Issue 378 / April 2013 Energy Economist

EU: new technology, new market model 3 Finding a policy path that meets the EU’s troika of energy sector goals was never going to be easy, but the number of perverse economic effects in EU electricity markets is growing. Policy-makers have created a sector heavily split between subsidization and ‘energy-only’ competition. Neither element appears sustainable and the feedback effects between the two are negative. Ross McCracken

Myanmar sets out market stall 6 Myanmar is rushing out of the cold after years of political controversy and sanctions. Having sold most of its current and upcoming gas supply for export, it needs a surge in new oil and gas exploration to support domestic economic growth. Explorers, warmly welcomed, are circling warily looking for deals, but fear that some of the country’s investment terms may reflect government inexperience. Chris Cragg

East Mediterranean gas options 10 Financial meltdown in Cyprus and a surprise rapprochement between Israel and Turkey could alter the course of East Mediterranean gas development. Proposals for an Israel- Turkey gas pipe may be back on the table, despite the risk of competition with cheap supplies from Iraqi Kurdistan. Cyprus’ ability to develop its gas resources alone looks limited, but its need for revenue has become much more urgent. David O’Byrne

The political tailwind of Superstorm Sandy 13 What a difference a storm can make. The political tailwind of Superstorm Sandy may prove more powerful than the storm itself. Sandy eroded not only the shoreline of the US Northeast last October, but political support for electric monopolies that has held for decades. Proposals are being put forward that these lifetime monopolies should face periodic auctions to retain their franchises. Elisa Wood

Egyptian stability 16 The removal of Hosni Mubarak from power lifted the lid on the simmering discontent of Egyptian politics. Two years on from the Arab Spring, the military has shown that it is prepared to tolerate an Islamist government. However, questions on the imposition of Sharia law, on economic policy, on relations with the West, and on Egypt’s place in the wider Middle East remain unanswered. Neil Ford

Gas glorious gas 21 Shale gas and oil has increased the energy sector’s susceptibility to a belief in revolutions. Thanks to Japanese research, a new enfant terrible may be emerging – methane hydrates. Not only does the research highlight the dichotomy between the supposed consensus on global warming and the direction of technological innovation, but gas hydrates have their own special place on the Godzilla scale of disaster.

Black Sea oil and gas 24 Exploration in the Black Sea has been overshadowed by large discoveries elsewhere. The region lacks support services, making deepwater drilling, in particular, expensive. Corruption, unstable political and regulatory environments complicate operations in many of the littoral states. Beyond the state-run operations of Ukraine, exploration remains piecemeal, last year’s significant gas discovery in Romanian waters notwithstanding.

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Contents Cypriot haircut

Features Apart from the general wisdom of taking what might be EU: new technology, new market model 3 Russian mob money without permission, the Eurogroup, Myanmar sets out market stall 6 IMF and European Central Bank have set a terrible East Mediterranean gas options 10 precedent in asking Cypriot bank depositors to undergo The political tailwind of Superstorm Sandy 13 a severe haircut. Regardless of the origin of the money, Egyptian stability 16 banks depend on confidence that deposits are safe. The Gas glorious gas 21 ‘troika’ have shown they are not. Black Sea oil and gas 24 There is now every reason to expect a massive destabilizing outflow of funds from Cypriot banks. This Events/Letters may dismantle a dubious offshore banking industry, but dodgy money won’t be the only funds to leave. Savers Forthcoming conferences and events 27 will also look at the other financially weak members of Letter from Jo’burg: BHP’s power deal exposed 28 the Eurozone and reconsider whether their deposits are Letter from Sofia: Domestic devils 29 safe there too. If the Eurogroup is prepared to smash Letter from Moscow: Chinese agreements 30 and grab in one country why not in another? A Cypriot exit Letter from Washington: More is less 31 from the Eurozone may be averted, but only at the cost Letter from Brussels: Skint EU mulls 2030 targets 32 of long-term recession on the island and a severe dent in the confidence of savings across the entire currency bloc. Market News Highlights For the European energy sector, the Republic of China reforms oil product pricing mechanism 33 Cyprus is a small market, but the impact of austerity Canada advances Arctic E&P prospects 34 across the Eurozone more broadly means further years PDVSA reports heavy oil progress ahead of snap election 35 of miniscule growth in energy demand. In a sector Libya starts oil and gas law revisions 36 undergoing significant structural change, it is hard to see Ukraine negotiating non-Russian gas imports 37 where – in such a low growth environment – the billions Japanese utilties look to diversify LNG supplies 38 of euros of investment will come from that are needed Morocco set for a series of exploration wells 39 to make the changes demanded by policy makers. Indonesia formulating coal production controls 40 For both bank bailouts and energy sector investment, Cheap coal won’t necessarily boost imports 41 the provider of last resort is ultimately the cash-strapped Wildcat strikes hit South African mining sector 42 consumer – as both Cypriots and Bulgarians have UAE commissions world’s first 100 MW CSP plant 43 discovered all too directly of late. Tax payers are already ACAL heralds fuel cell breakthrough 44 being tapped across the EU by the growth of renewables Trends in Middle Eastern power generation 45 subsidies and socialized levies for investment in transmission and distribution. This represents a Data fundamental deviation from the intended private sector sources of funding that the EU’s internal energy market EU carbon prices rise on signs of intervention support 46 is supposed to promote, one that will likely prove Brent drops $6/b in March 47 unsustainable. — [email protected]

Energy Economist Issue 378 / April 2013 ISSN: 0262-7108

Editor Energy Economist is published monthly by Platts, a division of The McGraw-Hill Companies, Ross McCracken registered office: 20 Canada Square, Canary Wharf, London, UK, E14 5LH. To reach Platts [email protected] Officers of the Corporation: Harold McGraw III, Chairman, President and Chief Executive E-mail:[email protected] Officer; Kenneth Vittor, Executive Vice President and General Counsel; Jack F. Callahan +44 1590 679 989 North America Jr., Executive Vice President and Chief Financial Officer; John Weisenseel, Senior Vice Tel:800-PLATTS-8 (toll-free) Managing editor President, Treasury Operations. +1-212-904-3070 (direct) Paul Whitehead Prices, indexes, assessments and other price information published herein are based on Latin America Associate editor material collected from actual market participants. Platts makes no warranties, express or Tel:+54-11-4121-4810 implied, as to the accuracy, adequacy or completeness of the data and other information Henry Edwardes-Evans set forth in this publication (‘data’) or as to the merchantability or fitness for a particular Europe & Middle East Tel:+44-20-7176-6111 Editorial Director, EMEA Power use of the data. Platts assumes no liability in connection with any party’s use of the data. Corporate policy prohibits editorial personnel from holding any financial interest in compa- Asia Pacific Sarah Cottle nies they cover and from disclosing information prior to the publication date of an issue. Tel:+65-6530-6430 Editorial Director, Global Power Copyright © 2013 by Platts, The McGraw-Hill Companies, Inc. Larry Foster Permission is granted for those registered with the Copyright Clearance Center (CCC) to Advertising Vice President, Editorial photocopy material herein for internal reference or personal use only, provided that appro- Tel : +1-720-548-5508 Dan Tanz priate payment is made to the CCC, 222 Rosewood Drive, Danvers, MA 01923, phone (978) 750-8400. Reproduction in any other form, or for any other purpose, is forbidden Platts President without express permission of The McGraw-Hill Companies, Inc. For article reprints con- Larry Neal tact: The YGS Group, phone +1-717-505-9701 x105 Text-only archives available on Dialog File 624, Data Star, Factiva, LexisNexis, and Westlaw. Manager, Advertisement Sales Platts is a trademark of The McGraw-Hill Companies, Inc. Kacey Comstock

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2 Energy Economist / Issue 378 / April 2013 Analysis European Union Power

EU: new technology, new market model Finding a policy path that meets the EU’s troika of energy sector goals – affordability, sustainability and security – was never going to be easy, but the number of perverse economic effects in EU electricity markets is growing. Having spent years in pursuit of smooth functioning markets, policy-makers have created a sector heavily split between subsidization and competition. Neither element appears sustainable and the feedback effects between the two are negative. Ross McCracken

Thuega Aktiengesellshaft, a conglomerate of 100 Policy reflected the market economics embedded in the German municipal energy utilities, has published a paper EU’s DNA – its treaties. The aim was to roll back the calling for a new energy market design. The report says state, break-up monopolies and introduce competition at the combination of long-term Feed-in Tariffs for every level from generation to transmission and renewables combined with an energy-only market for distribution in pursuit of electricity at least cost. This conventional power plants based on marginal cost “is drive was adopted with differing levels of enthusiasm by not suitable to implement the energy revolution.” member states, those less neoclassically-inclined modifying, delaying and disrupting the deregulatory thrust The group proposes a model that integrates both of policy over decades. aspects of the current German market – the Renewable Energy Source Act (EEG) and conventional wholesale But as the politics of climate change heated up, the electricity markets. Government would hold auctions for issue of decarbonisation gained in ascendency. It new renewable capacity, allowing it to control the speed was soon apparent that expensive renewable energy of the energy transition. Winners would receive a phased technologies were not going to be adopted by the investment subsidy for the construction of the facilities. market on their own. The market had no means of accounting for external environmental costs without Renewable and conventional electricity would be traded regulation, nor did individual companies have on the basis of variable costs, a competition which sufficient incentive to take the risk of developing renewables would automatically win. Two capacity new technologies alone. The EU Emissions Trading markets would be required; one for security of supply Scheme was designed as a market mechanism in that would include all generators, storage and Demand tune with the underlying structure of the emerging Side Management; and a second for refinancing internal energy market, but exempting renewables renewables’ investment costs. from state aid rules and adopting the legally binding 20/20/20 targets at EU level allowed rapid, The proposals are intriguing as they address the nationally-differentiated growth of a subsidized sector changing nature of price formation in wholesale within the body of the internal market. electricity markets and the means of compensating market functions that have utility, particularly in the Unintended consequences context of a low carbon energy system, but are not A number of perverse affects have arisen. First, coal is rewarded through current market structures. They aim to proving the most economic fuel to run, despite its heavy replicate a market system, but also reinstate a more emissions. The low price of carbon allowances in the direct means of strategic planning. ETS means there is no effective disincentive to producing high levels of emissions. This, in some parts Shifts in direction of the EU, threatens energy security because under the The two major trends in EU power and gas sector policy Large Combustion Plant Directive, old coal plants’ of the last two decades have been deregulation and remaining lifetime is limited to a fixed number of decarbonisation. They did not occur simultaneously. First operational hours before closure. This allocation is being came the design of the internal energy market, which used up more quickly than expected as coal is currently was predicated on what existed at the time – centralized the most profitable fuel to burn. plant, with fuel burning stations setting the marginal price of power, which reflected the relative cost of The risk is that new plant is not brought on-line in time supplying oil, gas or coal. to replace the closures, causing a serious drop in the reserve margin, or that baseload plant is replaced with Hydro had hit the constraints of geography, while nuclear variable output, creating operational risks. That coal is in was adopted wholesale only by France and, as a must- the money today doesn’t mean the level of newly- run baseload power provider, is in any case a price constructed coal plant will match the amount being taker. The technologies that set the marginal price of retired. New coal plant faces tough environmental power were sufficiently similar in operation and in the opposition, has to compete against subsidized split between capital and fuel supply costs to create a renewables and faces the possibility of future cost competitive market. burdens over its lifetime, such as Carbon Capture and

3 Energy Economist / Issue 378 / April 2013 Analysis European Union Power

Storage requirements, or the possibility that the ETS Tough transition might one day be made to work. This hybrid policy mix could be seen as transitional. Renewable technologies are subsidized to facilitate Second, natural gas had been expected to expand its their market penetration and crucially to allow share of the generation mix as a cleaner alternative to economies of scale and manufacturing development coal and to play a quick response role that would to bring down their cost to a competitive level. mitigate the effect of increasing variability in the Subsidies are then phased out and the internal energy mix. However, it is currently expensive relative market starts to do its job, with a permanent to coal and in relation to wholesale electricity prices. financial bias towards clean energy via the ETS, The reasons are varied. Gas prices retain a link to oil which acts as a means of monetizing the external prices, despite some significant changes in contractual cost of environmental pollution. terms, and oil prices remain high, making gas expensive. The EU still lacks sufficient diversity of gas However, the reason for the malfunctioning of supply sources. The requirement for peaking plant has wholesale electricity markets is not simply the not expanded as expected. Electricity demand remains subsidized nature of renewables. Nor was it fairly static, or in some markets has fallen, while new necessarily clear that markets were delivering a capacity is still being added. desirable energy mix in the first place. The combination of short-term pricing signals from As a consequence, the value of new gas plant is being wholesale markets and the shrinkage in investment written down and plants are operating insufficient hours horizons engendered by privatization and deregulation to make them profitable. Gas-fired plant built on the removed a degree of strategic direction and national premise that demand for power would continue to planning. This produced a tendency for rushes for one expand strongly have come on-line in a very different particular technology, in short whichever looked most environment to that expected when the original profitable at the time. Nuclear proved near impossible investment decisions were made. As a result, calls are to build in a market environment. growing to provide capacity payments. Whether desirable or not, this would add another element of distortion to An eventual transition to an internal energy market the competitive wholesale market. designed for a different era, following a transitional period in which the current market anomalies are Third, renewables are still expanding and will continue to resolved, is unlikely. The nature of price formation in expand to meet the legally binding 20/20/20 targets. wholesale markets has changed because the The more power they produce, the more evident the cost technologies supplying it have changed. As a result, of the subsidies paid. In a number of EU countries, as Thuega Aktiengesellshaft argues, the current generous Feed-in Tariff policies have contributed to market design may no longer be fit for purpose. uncontrolled booms in renewable capacity, which have Moreover, technology will continue to change and had clear impacts on wholesale electricity prices. may do so radically.

The growing cost of renewable energy subsidies has In continental Europe, a combination of DSM, been compounded by the additional investment increased storage capacity in the form of pumped required in grid infrastructure to deal with hydro, wind penetration and a huge build out of solar distributed, variable energy inputs. The rise of PV have had the effect of reducing the difference renewables has created a large non-market segment between peak and off-peak electricity prices. Storage within the overall sector, which acts to depress and DSM compete with each other and both wholesale electricity prices, undermining the compete with peaking plant. functioning of the competitive segment. The cost of renewables bypasses the wholesale market and The development of large storage capacities throughout finds its way on to retail bills through social levies electricity systems, via various technological routes, and taxes. As a result, even though wholesale prices would be a revolution in itself. However, storage has the are depressed, consumers’ bills keep on rising. unfortunate characteristic of undermining its own profitability; the more storage there is, and the more efficient it is, the more stable prices become. There is a real dilemma in terms of how the utility of storage PLATTS POWER IS ON TWITTER capacity can be compensated, just as there is over the means to compensate gas-fired reserve capacity as FOR UP-TO-THE-MINUTE POWER back-up for renewables. NEWS AND INFORMATION FROM PLATTS Storage isn’t even the main reason peak and off-peak Follow us on twitter.com/PlattsPower prices have moved closer together. The extraordinary build out of solar PV in Germany, which now amounts to over 30 GW, delivers output almost perfectly aligned with German week-day demand. Add in some wind and

4 Energy Economist / Issue 378 / April 2013 Analysis European Union Power

there is an increasing incidence of peak prices dropping EU energy regulator says capacity markets below off-peak. In good summer conditions, German PV are a last resort output can meet half peak time demand. Using capacity markets to promote investment in flexible As renewables have no fuel cost, once built they will electricity generation can be justified, but only if always be the cheapest to run and will always be at electricity markets alone do not function correctly, EU the top of the merit order, even without preferential energy regulatory agency ACER said in an opinion policies. Must run baseload power will remain posted on its website March 12. The European unchanged and continue to take the price it is given. Parliament’s energy committee requested the opinion to address the concern in many EU countries that the Renewables will become the main factor in price current market design is not able to guarantee electricity formation, but remain unresponsive to price because supply given the increased penetration of intermittent they have no fuel cost. They are a new creature renewable generation like wind and solar power. altogether – must-run variable power – for which an energy only market is ill-prepared. “The political sensitivity to blackouts, as well as uncertainties about when investors will build new As a result, wholesale electricity prices are becoming generation based on market prices, has compelled a increasingly disconnected from the cost of fuel supply, number of member states to intervene in order to creating a highly uncertain future for gas-fired power ensure that the required amount of capacity is plant in particular. The EU’s internal energy market will available. Some member states intervene or have the revolve around wholesale prices that are increasingly intention to intervene by introducing so-called capacity meaningless in the sense that they do not adequately markets,” ACER said in its opinion. reflect the cost of electricity production and do not send ACER said an “energy only” market – where generators useful signals to inform investment decisions. are rewarded only for the power they produce, not for the capacity they have on stand-by – should be enough This appears to be the current trend, but there is no to ensure electricity supply meets demand as long as knowing what the future holds because technology is certain conditions are met and there are clear price shifting so rapidly. The impact of new technology is signals. These include truly market-based electricity particularly hard to gauge because so many prices, free from political interference, and a stable developments are taking place at the same time and policy and regulatory regime to give investors confidence it is the combination of impacts that is important that policy-makers or regulators will not intervene when and difficult to predict. For example, the prospect of prices spike, ACER said. It added that investors needed power to gas, or of low cost fuel cells, could see a to be satisfied that the return for their investments would come from possibly infrequent price spikes. storage and balancing system based on a two-way flow between gas and power, where excess in either ACER said it was “aware that, at present, these can be used to meet a shortfall in the other. Gas conditions may not always be met: there is significant could regain some of the complementarity with interference in the price formation process in energy renewables that it appears to have lost. markets...and frequent price spikes may not be politically acceptable.” It also said that there was The EU has made significant progress in moving limited use of demand response, where users can cut towards its goals of security and sustainability their demand in response to high prices. through the implementation of its energy packages. “Active participation in demand response can be Affordability is much more intractable because the promoted by a regulatory framework which fosters high cost of developing new technologies and customers’ understanding of information on electricity upgrading infrastructure to cope with new forms of markets ... e.g. through smart meters,” ACER said. It power generation is largely inescapable. It has been added that consumers also needed easy ways of necessary to socialize these costs – a method which responding, through access to time-of-use or “dynamic” has more in common with the historic development pricing – where prices rise in line with demand — , or of electricity systems than competitive markets. interruptible contracts, where supply to non-critical demand is shut off at times of peak demand. The gains the EU has made have been slow and hard ACER said that if these conditions are not met “there won and there will be a natural resistance to re-opening is no guarantee, even once the EU electricity market debate over which energy market model is most integration process is completed, that an energy-only appropriate. However, renewables introduce must-run market will be able by itself to deliver the required level variable output into the generation mix, and the relative of resource adequacy and system flexibility”. Therefore importance of capital and fuel cost has shifted in favour capacity payments could be justified, as long as they of the former. The anomalies in the current market with do not distort the market, it said, adding that it needed regard to coal and gas use are signs that Thuega to carry out further analysis before reaching detailed Aktiengesellshaft’s diagnosis at least is correct – conclusions. ACER’s views are in tune with many of subsidized renewables feeding into wholesale electricity the responses to the European Commission’s markets for conventional power generation is not a consultation on capacity remuneration mechanisms suitable structure for the energy revolution. which closed in February. — Paul Whitehead

5 Energy Economist / Issue 378 / April 2013 Analysis Myanmar Oil & Gas

Myanmar sets out market stall Myanmar is rushing out of the cold after years of political controversy and sanctions. Having sold most of its current and upcoming gas supply for export, it needs a surge in new oil and gas exploration to support domestic economic growth. Explorers, warmly welcomed, are circling warily looking for deals, but fear that some of the country’s investment terms may reflect government inexperience. Chris Cragg

Something unusual is afoot when a street trader flags in south east Asia with a still remarkable treasure down your cab to offer a paperback copy of the new house of stately colonial architecture. Buildings that Foreign Investment Law of 2012. Get your ‘visa on in Singapore or Kuala Lumpur have long been arrival’, go through immigration, pick up your bags, bulldozed for shopping malls are still extant, waiting change your dollars and your first encounter with non- hopefully perhaps for the arrival of international officialdom in Myanmar is a man stepping off the banks to refurbish them. There is not a MacDonald’s pavement to offer the rules for new investment. sign in sight and the wide roads are still relatively free of traffic. Myanmar’s welcome to foreign investors could not be warmer, or the smiles wider. After years of The country has an estimated population of 50-60 sanctions on visas, investment and exports from the million, with a GDP per capita of around $500 and country to the US and the EU, the new government one vehicle for every 100 people. This compares for the Union of Myanmar is keen to make up for with Thailand, a mere 300 miles across the border, lost time. In virtually every part of the economy the with a GDP per capita of $9,500 and 13 vehicles per door is wide open for joint ventures. 100 people. The aim is to catch up and expectations are high. It is not difficult to see why. Yangon (Rangoon) boasts in its tourist pamphlets of being the last city Energy sector investment The energy sector is widely seen as the main motor of Myanmar gas production and exports change. The country’s energy consumption is dominated by fuel-wood to the level of 61% of its primary energy. In (Bcm) the central valley of the Ayeyarwady River (Irrawady), 15 south of Mandalay, there are thousands of villages Gas production Gas exports to Thailand unconnected to electricity and this applies even more to the mountainous areas of the north. 10 Out of a grand primary energy total per year of 4 million tons of oil equivalent, electricity production 5 accounts for 0.8 mtoe and transport considerably more than half. The country generates around 9,700 GWh a year of electricity, compared with Thailand’s 0 163,700 GWh. Total installed generating capacity is 1995 1997 1999 2001 2003 2005 2007 2009 2011 4 GW, more than half of it hydro capacity. Source: BP Statistical Review of World Energy, 2012 Although the government is expanding hydro capacity, Local market – Thai gas production the quick solution to this lack of power is seen as and consumption natural gas, and the means of its exploitation foreign participation. Ignoring Myanmar’s strategic geographical (Bcm) 50 position in relation to China and India, the country offers Consumption guaranteed domestic demand for the commodity, Production combined with a largely unexplored offshore area that is 40 highly likely to be productive.

30 Roll up More than 150 delegates attended the CWC Group’s inaugural Myanmar Upstream Summit Conference 20 held in Yangon in March. It was co-hosted by the Myanmar Ministry of Energy and its national oil and 10 gas company, the Myanmar Oil & Gas Enterprise. 1995 1997 1999 2001 2003 2005 2007 2009 2011 More than a few of the usual suspects were there: Source: BP Statistical Review of World Energy, 2012 despite sanctions, US company Unocal and France’s

6 Energy Economist / Issue 378 / April 2013 Analysis Myanmar Oil & Gas

Total have been involved in the country for a decade, Myanmar Production Sharing Contract 2011 suffering sustained criticism from NGOs as a result. General Terms and Conditions

ROC Oil and BG took to the conference platform, while „„Technical Evaluating Agreement: 2 years only for many more from TNK-BP to ExxonMobil and Anadarko on offshore deepwater blocks. down were in the audience. When asked whether the „„Exploration Period: initial term 3 years (after which offshore had potential, one anonymous executive the contractor will have the option to relinquish) 1st remarked: “Why do you think I’m here?!” extension 2 years; 2nd extension 1 year (contractor can relinquish at end of each). Myanmar’s history of hydrocarbon extraction is a long „„Production Period: 20 years (or based on reserve). one, starting in British colonial times. However its ‘golden age’ was in the 1980s, when the country was „„Royalty: 12.5% (may differ depending on water producing more than 30,000 b/d of oil. According to U depth for deepwater offshore blocks). Soe Myint, the former director-general of the energy „„Income Tax: 25% on contractors’ net profit. (3-year ministry’s Energy Planning Division, the government tried tax holiday starting from production). to sustain the industry by offering blocks back in 1978, “but nobody came”. By the late 1990s oil production „„Domestic Market Obligation: 20% of crude oil and had sunk below 10,000 b/d. 25% of natural gas of contractor’s share of profit petroleum sold at 90% of Fair Market Price.

Salvation came in the form of the offshore Yetagun and „„State Participation: 15% of undivided interest and Yadana gas projects. In 1992, Total, Chevron PTT-EP of MOGE has the option to extend up to 25% at its Thailand and MOGE signed a Production Sharing own discretion. Agreement for 30 years, primarily motivated by the „„Governing Law: Laws of the Republic of the Union potential for gas exports to Thailand. First gas was of Myanmar. delivered in 1998 and the field now produces 780 million cubic feet a day, of which 586 MMcfd goes to „„Arbitration: Myanmar Arbitration Act 1944, Thailand and 186 MMscfd to the domestic market. The UNCITRAL Arbitration Rules. field fuels about 20% of Thailand’s electricity and 70% of Source: Myanmar Energy Planning Department, Ministry of Energy the existing Myanmar market.

The second offshore field, Yetagun, had a harder history, gas production. Yetagun and Yadana both targeted since it started out as a joint venture between Texaco, Thailand as does Zawatika. Shwe gas will go to China, Premier and Nippon Oil. Both Premier and Texaco while onshore production is declining. Although the twin subsequently withdrew under pressure from both the US Myanmar-China pipelines are expected to yield $150 government and human rights activists, but Malaysia’s million a year in transit fees, Myanmar has left itself Petronas took over and PTT-EP and MOGE continued, starting little for the domestic market. production in 2000 with about 200 MMscfd, climbing to 400 MMscfd, all of which was exported to Thailand. The country is bound by contracts to honor its export commitments, but needs gas for the domestic market if There are two additional projects coming on stream; it is to develop. There were widespread public Shwe and Zawatika. The latter is a PTT-EP operation with demonstrations in Yangon and Mandalay in 2012 about three fields with a projected output of 300 MMscfd, 80% the priority given to gas exports, despite the lack of of it going to Thailand. Shwe is a Daewoo operation with domestic electricity. Conscious that it generally takes a partners from ONGC, GAIL and Korean Gas. The market decade to produce gas after signing a PSA and that target here is more controversial, with a subsea pipeline domestic gas supply will reach a peak of 0.5 Bcfd in running to shore in the south of Myanmar and then 2015, compared with an export peak of 1.7 Bcfd in the traversing 2,520 kilometers overland to China’s Yunnan same year, the government’s electrification and province and beyond, parallel to a new crude pipeline, to development goals mean it needs gas in a hurry. be fed by Saudi Aramco. As a result, the FIL stresses that oil and gas production Elsewhere, 15 offshore blocks have been awarded. As a “must first fulfill the consumption requirements of the result of western sanctions, with the exception of Baker country, both for the short and the long term.” Only after Hughes’s MPRL, all are operated by Asian companies – this stipulation has been satisfied can the surplus be Korea’s KMDC, Rimbunan, Petrovietnam, CNOOC and exported. Furthermore, any involvement in Myanmar Petronas. The country is putting up more than 20 requires a joint venture with an indigenous company. additional offshore blocks for auction, which it hopes will attract genuinely international interest. Foreign Investment Law After some standard stipulations, which read a little like Myanamar’s military regime aimed to maximize revenue, a set of strict school rules, the Myanmar Oil & Gas and in particular hard currency, at the expense of Enterprise is introduced. MOGE appears to be the key: domestic development and rather oversold its existing “It is the Government,”, says the FIL.

7 Energy Economist / Issue 378 / April 2013 Analysis Myanmar Oil & Gas

MOGE represents the government in any PSC, it is the Investment rewards project owner, the regulator of the PSC, the counterpart As Craig McMahon, head of Upstream Research, East to the investor and a partner in the contract. “MOGE, by Asia at Wood Mackenzie pointed out, Myanmar is 12th right, shall have and be responsible for the management highest out of 84 regimes in terms of government tax of the operations contemplated under the PSC,” the FIL and royalty take. Yet only 100 exploration wells have reads. The investor is responsible to MOGE and has the been drilled offshore. This is part reflects sanctions, but exclusive right to explore and produce in the area equally, the offshore is largely unexplored and lacks stipulated under the PSC, but must provide all the virtually any 3D seismic. financial and technical facilities required, and carry the risk of all operating costs. However, the crucial issue is not the government take itself, but the price of gas. Tax can be peanuts, but if Projects will be controlled by a set of committees, the price of gas in the domestic market is low – as in headed up by four representatives of MOGE and three Bangladesh – companies have little incentive to explore. from the company. The exploration period starts within The opposite also applies, high taxes can be borne if 90 days of signing the PSC and lasts three years, gas prices are high, and the gas price in Myanmar is extendable for another two. Seismic will be run in the certainly attractive. first year and a well drilled in the second and another in the third. It is worked out on a formula indexed to the US inflation rate and the fuel oil price. Yadana gas is currently priced If all this sounds authoritarian, allowances have to be at $8.65 per Mcf, while the average gas price in January made for the government’s capacity to murder the was put at $12.36/MMBtu ($/Mcf/1.023=$/MMBtu). English language through the absence of full stops. This is clearly an incentive for exploration, but it is not Several decades of military rule is hard to shake off clear how the country can afford it for indigenous use, linguistically. The problem is not that the government is as opposed to export. unwilling, but that it is inexperienced. As a result, there are worrying aspects to the FIL. The answer appears to be a high level of subsidy of at least $5/MMBtu, which squares with the price One obvious example is that the FIL itself has no system paid by foreign companies of $6.06 per Mcf. Locals to allow for international arbitration. The law stipulates pay 6,060 kyats for the same amount, or $6.94/ that “(a) Disputes are to be resolved amicably and (b) If MMBtu at current rates. The FIL’s Domestic Market there is no amicable settlement and if there is no prior Obligation requires that a contractor sells 25% of its agreement of dispute settlement mechanism, to resort profit gas at 90% of fair market prices in Myanmar. to the existing laws of the Union of Myanmar.” This DMO obligation may increase depending on how rapidly the local market develops with sales for As one delegate put it, “if they think anybody’s going to power and for CNG fuelled vehicles. The government invest a brass cent with arbitration dictated by the and MOGE clearly aim to use their take from existing laws of Myanmar, they have another think offshore fields to electrify the country. coming!” The government is moving to address this and parliament approved a decision to join the Convention on Gas production beyond the DMO can be exported. the Recognition and Enforcement of Foreign Arbitral Government plans include an effective doubling of Awards 1958 (New York Convention) March 6. Myanmar Myanmar’s primary energy consumption by 2030. is also committed to implementing the Extractive The domestic market was supplied with 265 MMcfd Industries Transparency Initiative. in 2012 and this is forecast to rise to 495 MMcfd by end-2013. Optimistic projections for demand, A second issue is that MOGE is not quite the Lord High involving a doubling in gas-fired electricity capacity, Mighty Decider it appears to be. It is a creature of the are put at 918 MMcfd in 2014. Even if this happens, Ministry of Energy, which also has an Energy Planning the gap is within the capacity of a single Yetagun- Department, responsible for regulation and coordination. type project, leaving the rest for export. There is also the Myanmar Petroleum Enterprise, which is responsible for Liquid Petroleum Gas. And beyond the And the export options are considerable. In addition Ministry of Energy, lies the all-embracing Myanmar to the existing and growing export market in Investment Commission. Thailand, China is not spending $1.9 billion on a gas pipeline into Yunnan and beyond with a capacity This, from its office in the capital Naypyitaw, has the of 12 Bcm a year to let it lie empty. Moreover, ultimate decision regarding any investment. A part of the Tokyo Gas was at the conference, noting the Ministry of National Planning and Economic Development, development of deepwater ports in special MIC must have its hands extremely full. MIC is regarded economic zones and dreaming of LNG. India, as a rubber stamp, but it isn’t. It has to scrutinize any represented by GAIL’s former chairman Proshanto environmental impact issues regarding hydrocarbons, but Banerjee, is still attracted by the idea of a pipeline also deals with banking, telecoms and investment in just that circumvents Bangladesh or goes subsea across about every other sector of the economy. the Bay of Bengal.

8 Energy Economist / Issue 378 / April 2013 Analysis Myanmar Oil & Gas

Myanmar’s offshore gas fields and pipelines to China

NEPAL CHINA Dukou Kathmandu BHUTAN INDIA CHINA

Salween Kunming Allahabad wadday ra Ir

BANGLADESH Mekong

Dhaka INDIA MYANMAR Calcutta Mandalay Lashio LAOS Capital city Tasang Major city Site-tway Ywathit Major rivers Shwe

Dams Salween Weigyi Gas elds Dagwin Existing transport routes Bay of Bengal Hatgyi Gas pipeline (under construction) Rangoon THAILAND Oil pipeline (under construction)

Yadana Bangkok Zawatika Yetagun

Andaman Sea Gulf of Thailand

Source: Platts

Human resources employees with extensive training programs. Total’s One problem might be the high level of local content Yadana project uses local contractors for catering, demanded for any E&P deal, with 25% of the logistics, maintenance, all civil works, IT and security. workforce to be indigenous after two years, rising to With its onshore pipeline activities, Total is 75% after six. This at first sight raised eyebrows, the preoccupied with providing health centres and various most common comment being that nobody is going types of agricultural training to the local villages to to risk spudding a $100 million deepwater well with the extent of test marketing cocoa in Paris. 75% of the personnel on board the rig unable to speak or read English. As Chevron’s Mariano Vela, President of Unocal Myanmar pointed out, “Chevron operates in both Myanmar faces a genuine challenge of human Bangladesh and Thailand with 90% local employees, why resources. As U Nay Htun, the former Secretary not here? It is the 10 year-old boys and girls now at General of UNDP and UNEP candidly put it: “We have school, who are going to be the workforce of the future.” lost an entire generation.” While English has been Indeed, Vela’s experienced attitude seems to be that taught in schools and universities, the absence of there really isn’t anything in Myanmar that IOCs have not foreigners to speak it with has severely limited its seen before and handled. use. Indeed, the best English speakers are all now over 60, like U Nay Htun himself. Political risk The final question is the risk of a return to a system The government is attempting to address this with like the old regime. The reason that the British, after television programs. The flood of new tourists three colonial wars of conquest, called the country certainly helps too, while UK and US universities are Burma – a name that still sticks to it like elderly glue queuing up to offer their certified engineering – is that they encountered and defeated the Burman degrees for study in Yangon. Besides, the law has elite. These constituted 60% of the population. the classic get out clause that specific technical staff may be brought in, if unavailable locally. The rest, Kachin, Mon, Inthar, Karen, Shan, Rohingya etc, made up the remaining 40% of the population and That said, after a decade of operating in the country, inhabited the mountainous and seaside edges of the both Total and Unocal have 90% indigenous country. Since the independence of the country in 1948,

9 Energy Economist / Issue 378 / April 2013 Analysis Myanmar Oil & Gas / East Mediterranean GAS

its internal history has been dominated by conflict Yet Myanmar has come a long way since 2008. US between the Burman elite, who controlled the army and President Barack Obama visited last November. the other ethnic groups that inhabited resource rich but President U Thein Sein went on European tour of undeveloped regions. capitals this March and then on to New Zealand and Australia. International goodwill is overflowing and $6 The net result of what has been described as ‘eight billion in bank debt obligations were cancelled in simultaneous civil wars’ was the military February. dictatorship, which led both to international isolation and effectively a stalemate in the conflict. It was the Over 90 national telecoms companies have realization of this combination of stalemate and expressed interest in two new communications economic stagnation that led to the 2008 change in licenses to be decided shortly. The country will chair the constitution and the decision to open up the ASEAN next year. Astoundingly, in March, parliament society. openly discussed cutting the military budget by 17%. Nothing was passed, but it was a straw in the wind. This constitution still mandates central control over the ethnic areas and the army retains 25% of the seats in It seems unlikely that the ruling elite would want to parliament and reports to the National Defense and return to the hard days of military, totalitarian rule. The Security Council, rather than the president. consequences would be just too painful and the Consequently, arguments about land rights and forced expectations raised by freedom much too high for the labour, relative to extractive industries and pipeline elite as well as the poor. And without the foreign construction, are still likely to haunt Myanmar for a long investment now requested, economic conditions would time to come, as is ethnic conflict. rapidly deteriorate. It seems too late to stop now.

East Mediterranean gas options Financial meltdown in Cyprus and a surprise rapprochement between Israel and Turkey could alter the course of East Mediterranean gas development. Proposals for an Israel- Turkey gas pipe may be back on the table, despite the risk of competition with cheap supplies from Iraqi Kurdistan. Cyprus’ ability to develop its gas resources alone looks limited, but its need for revenue has become much more urgent. David O’Byrne

As British Prime Minister Harold Wilson once archly farmed into the block with a combined share of 30%, observed, “A week is a long time in politics”. But in the and appraisal work is expected to start in the middle Byzantine complexity of East Mediterranean politics of this year. Noble, Delek Drilling and Avner Oil are where national blood feuds drag on for decades if not all also partners in Leviation, which lies in adjacent centuries, a week here or there generally makes little waters. One development option would be an LNG difference to the bigger picture. Yet one week in March plant in Cyprus to which both Aphrodite and the appears to have altered dramatically the prospects for Israeli gas could be tied back. the future development of the region’s recently discovered gas reserves. However, two events have changed the situation. First, Cyprus was forced to turn to the Eurogroup, At the start of the month, relations between Israel and IMF and European Central Bank for an emergency Turkey were still frozen as a result of the killing three bailout to save its banking system from collapse. years ago by Israeli commandos of eight Turks on board The terms were harsh, including a tax on deposits an aid ship running the Israeli blockade of Gaza. Unless held in Cypriot banks designed to raise €5.8 billion Tel Aviv apologized for the killings, agreed to pay ($7.5 billion). Second, Israeli Prime Minister compensation to the families of the victims and ended Benjamin Netanyahu conceded to two of Turkey’s its blockade of Gaza, Ankara would not entertain conditions for unfreezing relations, apparently at the proposals that gas from Israel’s offshore Leviathan field behest of US President Barack Obama. be exported by subsea pipe to Turkey and then onward to European markets. A Cypriot bailout was finally agreed with the Eurogroup, with deposits under €100,000 escaping a tax, but Cyprus was the beneficiary of this freeze in relations. despite the deal, Cyprus’ situation remains far from US company Noble Energy made a gas discovery with clear. The agreement, as Energy Economist went to a gross mean reserve of 200 Bcm on the Aphrodite press, only covers the country’s troubled banking sector, field in Block 12 offshore Cyprus in December 2011. but does not address any of the deeper systemic Israel’s Delek Drilling and Avner Oil Exploration have problems plaguing the EU member state.

10 Energy Economist / Issue 378 / April 2013 Analysis East Mediterranean GAS

Israel’s position is clearer. There is some doubt that done little to clarify the country’s long-term economic Israel will concede to Turkey’s third condition – that it lift prospects. The Republic’s former economic strategy the blockade of Gaza – but also some doubt as to of attracting large deposits of “dubious” cash from whether Ankara will insist on it. It now seems likely that Russia and the FSU countries along with the rumors circulating for some weeks will be confirmed; money’s owners is in tatters as the bailout terms that Israeli and Turkish officials have been in contact to still include seizing around €5.8 billion in bank discuss the feasibility of a gas export line to carry deposits, much of it from Russian depositors. It Leviathan gas to Turkey and on to Europe. seems a safe bet that the remaining €20 billion or so of Russian cash will leave the country sooner Development options rather than later. The Leviathan field, which is located 160 kilometers west of Haifa in the Mediterranean, holds estimated Given that Cypriot attempts to broker a rescue deal reserves of 470 Bcm and is being developed by a with Moscow prior to the Eurogroup deal failed, consortium of US company Noble Energy and its Israeli Moscow may have accepted the loss as inevitable. partners Delek Drilling, Avner Oil and Gas and Ratio Oil Despite earlier interest in Cyprus’s offshore, Exploration. In December, Australia’s Woodside Russia’s oil and gas companies do not appear to Petroleum signed an agreement to acquire a 30% stake have been swayed by the reported offer of a major in Leviathan, but the deal depends on the Israeli role in the island’s nascent gas sector, or at least government allowing Leviathan’s gas, or at least a not one negotiated under the pressure of impending proportion of it, to be exported. financial collapse.

To date the consortium has focused on the Whatever may have been offered, the rumors were possibility of exporting the gas as LNG with a sufficient to prompt a lengthy warning from Ankara floating LNG project being developed for the smaller against Cyprus using its natural resources as neighboring Tamar and Dalit gas fields, which hold collateral in any bailout deal. Turkey specifically around 238 Bcm, as a possible model. In February, warned of a possible “new crisis in the region”, the consortium developing Tamar signed a should Nicosia “offer the natural resources of the preliminary 20-year sales agreement with Russia’s island as collateral for a solidarity investment fund Gazprom giving it exclusive purchase rights to the or any other borrowing scheme to be established LNG produced from the field, although it was due to its current economic crisis.” subsequently warned by the Israeli government that its primary business was to supply the needs of the The statement issued by Turkey’s foreign ministry Israeli market, which would involve constructing only reiterated Ankara’s commitment to protect the rights a short pipeline to shore. of the Turkish community, which occupies the northern third of the island in the unrecognized While a floating LNG vessel or platform is thought to be Turkish Republic of North Cyprus (TRNC) and to viable for Tamar, export from the larger Leviathan field exploiting the island’s natural resources through a would be cheaper if conducted by pipeline. A subsea negotiated settlement. pipe to Turkey is estimated to cost in the region of $2 billion, compared with as much as $8 billion for FLNG, The fact remains that until and unless a settlement is the high cost a reflection of the fact that although some reached between the two halves of the divided island, projects are underway no such vessel has yet been built. questions remain over the legitimacy of Nicosia’s A subsea pipeline could be designed to be scaleable to unilateral prospecting of the island’s offshore and sole accommodate new gas discoveries, including Cyprus’ ownership of resources discovered. Turkey has Aphrodite field. consistently challenged the legitimacy of agreements signed between Cyprus, Egypt, Lebanon and Israel The third option is an LNG plant on Cyprus, which would delineating the Eastern Mediterranean into respective be fed by both gas from Leviathan and Aphrodite. This is Exclusive Economic Zones, and itself claims areas which favored by the Cypriot government. Prior to the bail-out Egypt and Cyprus see as their own. crisis the Cyprus National Hydrocarbon Company had said it was preparing a proposal that would lead to the More importantly perhaps, Cyprus faces the problem of drawing up of an investment plan and negotiations with how to monetize its gas reserves, which would be companies interested in participating in the LNG project. complicated by an Israeli-Turkish agreement on a Minister of Commerce, Industry and Tourism Neoklis pipeline. A pipeline west across the Mediterranean to Sylikiotis told the Cypriot media in February that Cyprus Crete and then on to the Greek mainland has been was looking to begin construction of the facility in 2015. proposed, but this has been ruled out by field developers Noble as unfeasible on both cost and Cyprus conundrum technical grounds. However, if the bailout deal agreed between Cyprus and the Eurogroup has prevented a comprehensive According to a report published in 2012 by the meltdown of the country’s financial sector, it has International Crisis Group, “Aphrodite’s Gift” the LNG

11 Energy Economist / Issue 378 / April 2013 Analysis East Mediterranean GAS

option is also problematic unless the known gas insurgency in eastern Turkey and over the past few reserves are at least doubled. This isn’t impossible years have increasingly targeted Turkey’s oil and gas as Italy’s Eni, South Korea’s Kogas and France’s pipelines, including several attacks on Turkey’s gas Total are all set to drill offshore Cyprus in the next import line from Iran. 24 months. This too appears about to change. Ankara has However, the requirements of financing an LNG plant recently admitted publicly for the first time that it is mean that even if more gas is found, it could take in negotiations with jailed PKK leader Abdullah 8-10 years to begin operations. Talks have been Ocalan. If successful, an end to the PKK insurgency held to drum up Israeli interest, but that interest would remove the only bone of contention between could wane if a pipeline to Turkey becomes possible Ankara and Erbil and open the door to a major as this would offer a quicker and cheaper route to energy deal involving the region’s oil and gas monetization. The subsea pipeline could also tie in reserves. well with the planned development of the Turkish- Azeri Trans Anatolian pipeline, which in its first Ankara and Erbil have for the past couple of years phase is set to have 14 Bcm of spare capacity. appeared to be on the brink of announcing major joint energy ventures. Rather than deny them, Ankara Cyprus will have to weigh its options carefully in the late last year declined to comment on rumors from light of its financial situation. Despite the possible the Kurdish region that Turkey’s state-owned impact of Cyprus’ gas reserves on the Republic’s upstream operator TPAO and state gas importer economy they appear so far to have played no part Botas would together develop a known gas field in in the Eurogroup’s calculations relating to the bailout the region. Turkish officials also last year briefed of the Cypriot economy. Similarly, Brussels doesn’t reporters that they thought the KRG had the right to appear to have considered that the bailout could export the region’s energy reserves without offer the perfect incentive for a settlement regarding permission from Baghdad. Several companies the reunification of the divided island. The developing prospects in the region are believed to Eurogroups’ immediate priority was the euro and the have gas which could quickly be made available for need to save the Eurozone from the contagious export, including Anglo-Turkish group Genel. effects of a collapsed Cypriot banking sector. However, that position was reversed at the end of However, as the dust settles, the hard work of the year when energy minister Taner Yildiz rebuilding an economy heavily dependent on tourism announced that Turkey would not permit the import will begin. The island’s long-term economic future, of hydrocarbons from the region without Baghdad’s particularly in terms of state revenues, now relies on approval. Turkish construction group Siyah Kalem, the development of its natural gas reserves. This in which had applied for a license to import gas from turn may be dependent on an agreement that ends the region, was informed that its gas purchase the island’s division into two states, allowing the agreement with the KRG would need to be approved exploitation of its natural resources with the by Baghdad before they would be issued with a cooperation and support of its neighbors, whatever license, which would in turn make the construction historical enmities may exist. of a pipeline feasible.

Kurdish competition The reason for Ankara’s volte face is unclear, but may Ironically, the main threat to the development of an reflect the desire to conclude a peace agreement with export pipeline for Israeli and Cypriot gas comes not the PKK first, before either attempting to broker an from the possibility of a return to normal hostilities agreement between Baghdad and Erbil, or tempting with Turkey, but from the possibility of more peace Baghdad’s fury by allowing the KRG to export its gas breaking out in the region. This could come in the anyway. In any event, a gas export line from Iraq to form of a lasting agreement between the Iraqi Turkey would be relatively cheap and quick to build. It central government in Baghdad and the Kurdistan would almost certainly allow Turkey to purchase gas at a regional government in Erbil, allowing the latter to favorable price. begin exports of its own sizeable gas reserves. While an offshore pipeline connecting Israeli and Cypriot Turkish relations with Baghdad have soured over the gas fields with Cyprus and then the Turkish mainland past two years for a number of reasons, including its would be cheaper to realize than either LNG export refusal to allow the extradition of fugitive Iraqi vice terminals or a pipeline to Greece, it would be unlikely to president Tariq al-Hashimi and more pointedly its deliver gas to the Turkish mainland at a price that could increasingly close relations with the Kurdistan compete with gas from Iraqi Kurdistan. That in turn may Regional Government. Relations with the KRG have force Israel and Cyprus back in the direction of LNG, blossomed despite the presence in the KRG- targeted at international markets rather than being tied controlled region of Kurdistan Workers Party (PKK) into the European market alone and dependent on fighters. The PKK has been conducting a low level Turkey for transit.

12 Energy Economist / Issue 378 / April 2013 Analysis US Power

The political tailwind of Superstorm Sandy What a difference a storm can make. The political tailwind of Superstorm Sandy may prove more powerful than the storm itself. Sandy eroded not only the shoreline of the US Northeast last October, but political support for electric monopolies that has held for decades. Proposals are being put forward that these lifetime monopolies should face periodic auctions to retain their franchises. Elisa Wood

Doubts about the wisdom of utility monopolies emerged to future storms. The result, some argue, will be a more after Superstorm Sandy’s 14-foot waves and gale winds resilient electrical system rising out of the rubble of the took out large swathes of the electrical grid in New York 1,000 poles, 900 transformers and 140 miles of cable City and nearby Long Island. More than two million New downed in New York City by the storm. Yorkers lost power, some for days, some for weeks and the most unlucky for months because their homes and Others predict that political meddling — and buck businesses were so damaged they couldn’t quickly be passing – could lead to more trouble. As put by Carl reconnected to the grid. Danner, Director at Berkeley Research Group and former chief of staff and advisor at the California As time wore on, with food spoiling and businesses Public Utilities Commission. “Hell hath no fury like a shuttered in the nation’s most populated city, regulator caught napping.” Those who hold sway over frustration rose among New Yorkers – and the the grid in New York want change; this bellwether politicians taking their phone calls. Governor Andrew state, he argues, could shake the underpinnings of Cuomo, a Democrat and possible 2016 presidential the contemporary utility industry. contender, raised the idea in a news conference of removing electric utility franchise rights – a basic Losing at monopoly element of the US electric industry that has never New York, now home to the debate over the decades-old before been seriously challenged. practice of granting electric utility franchises, is also the birth place of the US electric system. It was Lower In Cuomo’s words utility franchises are not guaranteed Manhattan where Thomas Edison electrified buildings in by “the Old Testament,” but are a product of state 1882 with his first power plant. As more and more regulation. What the state gives it should be able to take generation and transmission was built over the years, the away, but under current law cannot. At first, some idea emerged that electricity service is a natural thought his words were bluster or the anger of the monopoly, delivered most effectively by one company in a moment. But six months later, Cuomo has continued to given terrain. New York and Wisconsin became the first challenge the sanctity of utility franchise rights. Cuomo states to regulate the industry in 1907, an approach that says he wants the ability to “fire” the utilities “without had spread to two-thirds of the states by 1920. going to court for 20 years.” Today, utilities have monopoly rights in all 50 states, but While the franchise debate is the most controversial the rules take different forms. In New York, a utility idea to emerge out of Sandy, it is not the only significant maintains its franchise through agreements with the change to the power sector that is under discussion. municipalities in its service territory. Utilities that came New York utilities are contemplating the creation of the into being after 1907 also hold the right through a state US’ first stockpile of wires, poles, transformers and certificate of public convenience and necessity, other grid components, an idea born out of seeing essentially an operating permit for a utility or public supplies dwindle during Sandy. Consolidated Edison, service company. The New York Public Service New York City’s utility, in one week used up a six-month Commission lacks the authority to revoke the rights, supply of crucial equipment. according to a report by the Moreland Commission, a special task force set up by Cuomo to look at how well As a result, New York utilities must file a stockpiling and utilities handled recent storms. equipment sharing plan by June 3. The idea emerged after Cuomo’s NYS 2100 Commission found a scarcity Since Sandy, Cuomo has made his doubts about utility of suppliers for extra-high-voltage transformers and other franchises clear in several public forums. He has called critical utility equipment, which in some cases takes state utility regulation “a toothless tiger.” He wants to months to replace. The report warned that severe give it teeth through legislative changes that would let storms might trigger shortages in the future. state regulators strip a utility of its franchise – should it fail to provide safe and adequate service – and then New York and other states hit by the storm are also seek a new company to take its place. “This is, right taking a closer look at building microgrids, once an now, an impossible relationship for the state, for the arcane and somewhat niche idea, but now viewed consumer. The utilities basically have franchises for increasingly as integral to a larger ‘hardening’ of the grid life,” Cuomo said.

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Cuomo has questioned whether the PSC “is really a Second, the state would need to establish the terms regulator” and utilities are truly “regulated entities.” “We of the auction: the bidding procedure, ranking criteria say that, but that is not really the way the relationship is and prequalification thresholds, such as experience, defined,” he argues. “You can huff and puff all you want, skill, and financial strength, as well as more and they still have the franchise.” subjective standards, which might be corporate culture and business plan. Third, regulators would The Moreland Commission has yet to issue its final make clear what they expect of winners and the report or lay out details of how the state might revoke a terms for rewards, penalties and cost recovery. franchise and replace a utility. But the interim report touched on the idea. It recommended changes in law Fourth, and perhaps most difficult, Hempling says, that would authorize the PSC to review the performance the state would need to lay out the path for of each utility at a minimum every five years or when the transferring property from the first franchise holder PSC finds cause to do so. to the second. This phase is crucial for two reasons: the original utility can’t remove the poles, wires and If the state determines the utility is unfit to provide safe substations and move them elsewhere, and and adequate service, it could order divestiture of some ratepayers have already invested money in the or all of the utility’s assets, “subject to both due infrastructure, he points out, so deserve fair process standards and the need for continuity of compensation. service.” The report also called for the state to establish its clear authority to revoke a utility’s certificate of public Hempling says the proper price is the depreciated book convenience and necessity. value of the assets because it guarantees the owner just compensation i.e cost recovery and return on New territory investment. The auction winner would then agree to the Little precedent exists for New York to follow. Regulators same method of valuing its assets when its franchise have taken away franchise rights from water utilities. But term ends, he says. in the electric sector, where large sunk investment makes franchise removal complex, punishment instead The process of auctioning assets is possible, but tends to come in the form of financial penalties. Still, not easy, and may net bids that are subpar in the while franchise revocation may be untried, it is not eyes of regulators, according to Berkeley Research impossible, according to Scott Hempling, an attorney Group’s Danner. If the electrical system is who specializes in public utility regulation and has unreliable, it is probably because the original utility written extensively on franchise issues. underinvested in the infrastructure, he said. So regulators will look to grant the franchise to a new In a paper published in January, Competition for the company willing to spend heavily in bringing the Monopoly — Why So Rare? Hempling proposes the idea system up to grade. of subjecting utilities to competitive pressure by holding periodic auctions for franchise rights. He lays out four Such a company may be hard to find, Danner said, steps that he said a state should take in preparation. since the state is essentially saying: “If we are not happy with what happens in this highly politicized First, he says, the regulator would set franchise terms – environment, we are going to take it away. Who’s the length of the contract under which a utility can hold interested?” Under this proposition, bids may be monopoly rights. Today the terms are indefinite. He scarce or they may carry a significant risk premium. suggests instead that after 20 to 30 years a franchise be Regulators may find “it turns out that people are not put up for auction. The utility wouldn’t necessarily lose the willing to pay nearly as much for the opportunity as franchise at that point, but would compete to keep the job. government thinks they should,” Danner said.

Historical storm comparison (service territory of Consolidated Edison)

Dated Type of storm Customers interupted 29 October 2012 Superstorm Sandy 1,115,000* 28 August 2011 Hurricane Irene 203,821 13 March 2010 Nor'easter 174,800 29 October 2011 Nor'easter 135,913 09 September 1985 Hurrican Gloria 110,515 02 September 2006 Tropical Storm Ernesto 78,300 25 February 2010 Snow 65,200 18 January 2008 Wind / Rain 61,486 31 March 1997 Nor'easter 45,180 19 October 1996 Nor'easter 41,830

*Note: includes Nor'easter Athena

Source: Consolidated Edison

14 Energy Economist / Issue 378 / April 2013 Analysis US Power

Hurricane Sandy power outages

(million customers) 9 All other states New York Peak customer outages from Hurricane Sandy (total customer outages of 8.5 million) Pennsylvania New Jersey Hurricane Irene total outages Electricity outages (thousand customers) 2,615 outages 1 outage 6

3

0 Sandy Oct-29 Oct-31 Nov-02 Nov-04 Nov-06 Nov-08

Irene Aug-27 Aug-29 Aug-31 Sep-02 Sep-04

Source: EIA

Haunted by nuclear debt 14 years because of losses absorbed when the New York’s situation is further complicated by the fact Shoreham Nuclear Power Plant was closed. that much of the focus is on a utility that is not even Consequently, there is virtually no money to invest in regulated by the PSC, the Long Island Power Authority. much-needed infrastructure upgrades, as much of it The PSC does not oversee LIPA because it is a non-profit goes to debt service,” said New York State Senator Jack public utility, and is in fact the second largest municipal Martins, a Republican who represents Long Island. utility in the US, measured by revenue. Others, such as Matthew Cordaro, a former utility A board of trustees, appointed by the governor and state executive and now chairman of the Suffolk County lawmakers, oversees the utility, fixing rates, hiring staff Legislature LIPA Oversight Committee, says the utility and handling other supervision. The utility came under suffers from its unusual operating structure. LIPA fierce public criticism during Superstorm Sandy for its contracts out management of its day-to-day operations, pace restoring power. And just two weeks after the currently to National Grid and beginning in 2014 to storm, Mike Hervey, LIPA’s acting CEO and COO, Public Service Enterprise Group, which beat out National resigned. The chairman of its board of trustees, Howard Grid and others who vied for the new $3.9 billion, Steinberg, followed soon after. 10-year contract.

The interim Moreland Commission report focused largely The larger question, though, is would a utility perform on LIPA because of “the urgent need to address the better in a storm if it stood to lose its franchise? Or are dysfunctional delivery of power” in its service territory. there factors at play that preclude it from doing so? The report called for privatization of the utility. As a Utilities have a story to tell, as well, Danner says, and private utility, LIPA would come under the jurisdiction of it’s one where rate increases for infrastructure state regulators, and then be subject to any new improvements can be hard to win. It is important to franchise auction rules the state may decide upon. consider the atmosphere in which the utility operates, he said. Why isn’t the utility investing in infrastructure now? But Long Island has already tried the private route. In How pressured is it by regulators to keep rates low, and fact, LIPA was born in 1998 out of dissatisfaction with is that pressure causing it to forego system upkeep? Is its predecessor, the Long Island Lighting Company, or money instead going into renewable energy or other LILCO, a private utility. LILCO came under fire for it public policy goals that state regulators or politicians high rates and investment in the now-defunct pressure the utility to pursue? Shoreham Nuclear Power Plant, a project that was built but never operated. LIPA ratepayers continue to carry “We need to be grown-up and understand that whatever its debt, a factor that has contributed to the utility’s lack of preparation or investment that occurred on the high rates and difficulty investing in its infrastructure, part of LIPA – they weren’t the only ones complicit,” say critics of the utility. Danner said. “There is only so much money, there is only so much time and attention. Just yelling at them “Central to any fix is the fact that LIPA is in debt for an without taking into account all of these conflicting incredible $7 billion dollars and has been for more than priorities doesn’t quite fit the bill. It is good that that

15 Energy Economist / Issue 378 / April 2013 Analysis US Power / Egypt Energy

governor is involved. It is good that the governor is upgrades, $1.5 billion in modernized and repowered concerned. But it sounds to me as if there is a bigger generation, $1 billion to replace retiring plants, and 270 picture to be concerned about.” MW of renewable energy. Neighboring Connecticut, also hit hard by recent storms, is looking increasingly at the For their part, the utilities have remained relatively quiet microgrid concept as well. – at least publicly – in the franchise debate. They say they are watching the Moreland Commission’s activities, Edward Krapels, CEO at Anbaric Transmission, which cooperating when asked, and awaiting further details. specializes in early stage development of transmission, sees microgrids increasingly coming to Innovation the fore for several reasons; reliability, yes, but also Meanwhile, the state is pursuing other avenues to because of public opposition to large transmission prepare for what Cuomo says will be a more stormy projects. “To me, microgrids have the force of gravity future as a result of climate change. He points out that behind them,” he said. “They are at the intersection Sandy was the second 100-year storm in just two years of high tech and the electric distribution systems. to hit New York. Early microgrid adopters like university campuses, data centers, progressive munis and a very few Discussion is heightening, for example, about the utilities are paving the way. The secret sauce is high installation of distributed generation in New York City. tech hardware and software that makes the Solar won some converts in Sandy’s aftermath when combination of distributed generation plus demand mobile units appeared in communities and people were controls greater than the sum of its parts,” he said. able to charge dead cell phones. Combined heat and power also captured attention when buildings with the Sandy was the largest, but not the only storm to hit the systems remained lit up amidst a sea of darkness. Now, US Northeast in recent years. State leaders worry that the word ‘microgrid’ is increasingly rolling off the the region has entered a new era of extreme weather, tongues of policymakers and politicians. which will test utility reliability as it has never been tested before. Hurricane Irene knocked out power for It not yet clear how microgrids will be built or who will do long periods in August 2011, and it was followed by an the building, but advocates see the possibility within a early blizzard in October 2011 that again caused $5.7 billion energy highway plan Cuomo began pushing widespread outages. This year’s hurricane season before the storm as a way to upgrade the state’s energy arrives in the region June 1. How the wind blows – or infrastructure. The plan calls for public/private how hard – may well sway pivotal decisions in this partnerships that include $2.3 billion in transmission influential part of the US.

Egyptian stability The removal of Hosni Mubarak from power lifted the lid on the simmering discontent of Egyptian politics. Two years on from the Arab Spring, the military has shown that it is prepared to tolerate an Islamist government. However, questions on the imposition of Sharia law, on economic policy, on relations with the West, and on Egypt’s place in the wider Middle East remain unanswered. Neil Ford

Egypt’s fate is of great importance to the global for anyone that can deliver better living standards. energy sector. Although only a middle ranking oil and The success or otherwise of the economy, in which gas producer, its possession of the Suez Canal gives oil and gas pays a major role, is crucial for political it influence over international oil movements. Cairo stability. The current situation is tenuous. The also holds an important position in the Middle East. government has sufficient foreign currency reserves With a population of 82 million, Egypt is by far the to cover only three months of imports and has failed most populous country in the Arab world. Pan-Arab to introduce agreed economic reforms, prompting the sentiment has been stronger here than in most other IMF to withhold a $4.8 billion loan. parts of the region and many Arab websites, organisations and publications are based in Cairo. If The IMF loan would help, but would still only cover a Egypt descends into chaos, the shock waves will be fraction of the government’s urgent debts. The state felt far and wide across the region. owned Egypt General Petroleum Corporation owes about $6.5 billion in unpaid bills for oil and gas that has Opinion polls within the country suggest that most already been consumed. Cairo has refused to take the people support neither the governing Muslim standard IMF medicine of reducing fuel subsidies. Brotherhood nor the liberal opposition, but will vote Egyptian oil and gas consultant Magdi Nasrallah,

16 Energy Economist / Issue 378 / April 2013 Analysis Egypt Energy

commented: “Every day we delay restructuring subsidies Suez versus the Cape bleeds state resources. The burden has become very high on the Egyptian government. It has become dangerous because Egypt is buying the share of the joint ventures at international prices and selling this share on at subsidised prices.”

EUROPE Economic prospects The Egyptian economy is supported by five main pillars: overseas remittances, tourism, textiles, Suez Canal Suez Canal ASIA revenues and hydrocarbons. Economic diversification is possible in the long term, but more immediately 7,200 miles 11,600 km President Mohammed Morsi needs some or perhaps all Mumbai of these sectors to perform well. Overseas remittances have been hit by the global economic downturn, with the AFRICA notable exception of Egyptians working in the Gulf. Tourist numbers have crashed since the Arab Spring and the European economic depression would restrict visitor numbers even if Egypt were politically stable.

Textiles are important because it contributes both 12,300 miles employment and export revenues. Over a million 19,800 km Egyptians already work in the sector and the government is trying to ensure that as much raw cotton is processed domestically as possible to retain more of the economic Source: EIA benefits of the industry. However, most production is controlled by state-owned companies that are being According to government figures, the value of starved of investment by the government, which has Egyptian gas exports increased by 4% last year to competing demands on its limited funds. Textile exports $22 billion, although the volume of piped and LNG fell 10% in 2012 and Magdi Tolba, the chairman of exports fell slightly to 45.8 million tons. Despite manufacturer Cairo Cotton Center, believes that political domestic economic frailty, domestic gas instability threatens growth in the sector. He says: consumption increased by 5.8% to 39.2 million tons. “Someone has to go and say: ‘enough is enough’. The The government continues to regulate domestic gas economy is bleeding.” prices, forcing producers to subsidize the Egyptian market through exports. The Mubarak government As a result of weakness in the rest of the economy, had vague aspirations of introducing more the government instructed the Suez Canal Authority commercial rates for domestic gas, but made little to increase rates for vessels passing through the progress on the issue. Canal, including a 4% rise for oil tankers. The secretary general of the International Chamber of The cancellation of the gas export contract with Shipping, Peter Hinchliffe, suggested that the Israel after the overthrow of Mubarak returned 60 increases could persuade shipping lines to switch to Bcf a year of output to the domestic market. the Cape route. He said: “Most international ship Although the country continues to export more than operators are trading in the worst shipping markets half of all gas production, it is likely that Egypt will in living memory due to there being too many ships become a net gas importer in the medium term. The chasing too few cargoes. This is not the time for the Arab Gas Pipeline, which takes Egyptian gas to SCA to be announcing increases, which for some Jordan and Syria, was mooted for extension to trades seem very dramatic indeed, and which many Lebanon and Turkey, giving access to European ship owners will find impossible to pass on to their markets. This now seems unlikely. Some gas customers.” It remains to be seen whether the tariff production is contracted over the long term to the increase will compensate for any loss of trade, but two established LNG projects, while domestic the steep fall in Somali pirate attacks has already consumption is likely to rise on the back of rising encouraged ship owners to return to the Canal route. demand from the power sector.

Given the limited options for raising revenue, Cairo is The chief executive of Egyptian firm Tri-Ocean Energy, considering ways of increasing its take from the oil and Mohamed El Ansary, said: “Currently we don’t need gas sector, but has thus far not changed the investment to do so, but in the future Egypt will not be self regime. Indeed, relatively few economic reforms have sufficient in natural gas. If we are to see real been introduced in any sector, as the government is still industrial development in the coming five to ten coming to terms with maintaining political control and years, we will have to import.” An international reforming the civil service. tender for LNG to supply the domestic market was

17 Energy Economist / Issue 378 / April 2013 Analysis Egypt Energy

launched by Egyptian Natural Gas Holding Company Even over the past two years of political uncertainty, in January and talks have already been held between some companies have invested in new exploration and Cairo and Doha over importing Qatari LNG. However, production projects. In March, Dana Gas announced that a cheaper option might be to reverse the direction of it had increased its production in Egypt through the first flow on the AGP and extend it into Iraq, allowing Iraq phase of development of the West Sana and Allium to pipe gas directly to Egypt. fields. Rashid Al Jarwan, the company’s acting chief executive, said: “The wells increase our production by Hydrocarbon hopes 20 million cubic feet per day, providing much needed The government is reluctant to impose new royalties or additional production to the Egyptian market and taxes on oil and gas producers because of the fear of maintaining vital supplies of gas for power generation.” deterring new investment. Despite rhetoric from some parts of the Muslim Brotherhood about squeezing money In early March, Apache announced that its Amoun out of foreign companies, ministers have sought to NE-1X well on the Khalda Ridge had tested at 3,186 support foreign oil companies. As so often happens, b/d of oil and condensate, plus 11 MMcf/d of politicians become more inclined to work with the private natural gas. The company plans to drill several other sector once in power. In February, prime minister Hisham wells nearby and all are located close to existing Qandil held talks with the chief executives of two of the production facilities, which should allow the biggest foreign oil and gas companies operating in the discovery to come on-stream quickly. The Unas Field country, BG and Apache Corporation, to discuss how on the southern side of the ridge was discovered national oil and gas production could be increased. last year and is also due for development.

While some progress has been made on exploiting the Apache has announced plans to drill an incredible 270 country’s renewable energy resources, most new power wells in Egypt during the course of this year, including generating capacity is likely to come from gas-fired 60 exploration wells. Thomas M. Maher, vice president plants, while the government is keen to increase and general manager of Apache’s Egypt Region, fertiliser production, so domestic demand for gas is commented: “The high oil and condensate yields likely to continue rising. The one thing that could slow encountered in Amoun NE-1X and the potential for down the country’s transition to a net gas exporter is the additional wells on the Khalda Ridge and Abu Gharadig discovery of substantial new reserves. Basin provide multiple opportunities for Apache’s active exploration and development program in Egypt.”

Egyptian GDP by sector, 2010 Political uncertainty The accession to power of President Mohammed Morsi Others (10.6%) Agriculture (14.5%) last May was opposed by the army. He replaced Sami Financial and business services (7.1%) Annan as chief of staff with the pro-Islamist Sedky Sobhi and stripped the military of any official political influence. Transport and storage, Oil and gas (14.5%) However, Morsi has sought to reach some kind of information and communication (10.6%) accommodation with the country’s military leaders and his dependence on the army intensified after renewed street protests in December, when troops were needed Wholesale and retail trade, hotels and restaurants (17.3%) Manufacturing (16.5%) to maintain control on the streets of Cairo.

Government service (10.2%) It is important not to exaggerate the extent of military opposition to the Muslim Brotherhood. Despite some Source: OECD claims to the contrary, Egypt has never had the same level of commitment to secular government as Turkey. Tonnage through and revenue from Moreover, if Turkey’s Islamist Justice and Development the Suez Canal Party managed to co-exist with the Turkish military establishment, there is no intrinsic reason why the (’000 cargo tons) ($ million) 800 6000 Egyptian army cannot co-exist with the Muslim Brotherhood. 5000 600 Democracy has not had an easy start in Egypt. The 4000 results of last January’s parliamentary elections were 400 overturned by the courts and a new ballot was arranged 3000 for later this year. In the face of political opposition, 200 2000 Morsi tried to bring the election forward to April, but the Tonnage Revenue (right axis) courts again intervened, insisting that the move had to 0 1000 2000 2002 2004 2006 2008 2010 2012 be sanctioned by the Supreme Constitutional Court. It appeared for a time that Morsi would try to curb the Source: Suez Canal Authority powers of the judiciary in response, but a statement

18 Energy Economist / Issue 378 / April 2013 Analysis Egypt Energy

finally appeared, conceding: “The Presidency respects Egypt's gas production and consumption Administrative Court ruling to suspend Lower House (Bcm) Elections & refer Elections Law back to the 70 Constitutional Court.” 60

Whenever the elections are finally held, it will be 50 interesting to see what level of enthusiasm they command. The official turnout in last May’s presidential 40 election was just 43%. In the earlier legislative elections, 30 the Muslim Brotherhood’s political wing, the Freedom Production and Justice Party, won 59% of the vote in the upper 20 Consumption house, the Shura Council, and 43% of the seats in the 10 People’s Assembly. These figures would suggest strong 2001 2003 2005 2007 2009 2011 support in many democracies, yet just 10% of the Source: BP Statistical Review of World Energy, 2012 population turned out for the Shura Council elections. Egypt's oil production and consumption It is easy to see why the Brotherhood was able to form the first post-Mubarak government. Western media (’000 b/d) 800 coverage of the Arab Spring focused on liberal protestors, but the Brotherhood was the biggest and best organized opposition party. It played a significant role in overthrowing Mubarak and benefitted from the 700 political and economic optimism that erupted in 2011.

However, it is easier to promise change than to deliver 600 it. One of the Brotherhood’s biggest strengths is its Production pledge to tackle corruption. Many governments around Consumption the world come to power on an anti-corruption platform, 500 but eradicating corruption necessitates deep-seated 2001 2003 2005 2007 2009 2011 cultural change that takes many years to inculcate. Source: BP Statistical Review of World Energy, 2012 Current political and economic uncertainty actually encourages corruption, as officials seek to profit where foreign support. On the outer extremes of Islamist they can in the knowledge that they may not be in their thinking, this group merges into Al Qaeda supporters positions for much longer. who want armed conflict and less cohabitation with Egyptian Copts. The new government rapidly became the target of popular discontent and resentment. The two biggest One of the biggest areas of dispute is the proposed sources of contention were both attempts by Morsi introduction of Sharia law. The Brotherhood intends to to cement his hold on power. Firstly, he sought to introduce it, but wants to do so gradually. The more grant the presidency immunity from judicial review; extreme Islamists demand its imposition now. Al Qaeda and secondly, his government drafted a controversial operatives are operating across North Africa and are new constitution. The document is relatively complex keen to target anyone opposed to their ideals, including and includes many unremarkable clauses, but it also more moderate Islamists. Given the bloody attacks on restricts freedom of assembly and speech, and Iraqi Christians and Syria’s many minorities, it is no places Islam at the heart of national life. wonder that Egypt’s Copts feel under threat.

Morsi backed down over the bid for immunity, but the The political opposition has tried to coalesce in the new constitution was approved by a popular referendum in National Salvation Front led by Mohamed El Baradei, the December. This triggered renewed protests in Tahrir Square former director general of the International Atomic – the epicentre of the campaign against Mubarak – and in Energy Agency. El Baradei responded angrily to the other urban areas. Clashes between protestors and police attempt to hold elections in April, arguing: “The mess soon became violent. An estimated 56 people were killed continues courtesy of epic failure of governance. in street protests in January and 15 more in February. Ignorance and manipulation of the essence of the state of law are the characteristics of a fascistic state.” It is easy to depict the current political landscape as one divided between the Muslim Brotherhood and its more As with the wide political alliance that overthrew liberal, secular opponents. Yet not all Islamists support Mubarak, it is clear what the NSF is against – Islamist the government and the political opposition is far from government – but it is more difficult to work out what it becoming a cohesive force. Egyptian Salafis are divided is in favour of. Comprising socialists, former Mubarak in their support for Morsi and some believe the supporters and pro-Western liberals, the NSF is still Brotherhood is far too ready to compromise to gain working out its own policies. Sections of the Front even

19 Energy Economist / Issue 378 / April 2013 Analysis Egypt Energy

view the current political situation as so untenable that The United Arab Emirates’ minister of foreign affairs, they favor temporary military rule. Shaikh ‘Abd Allah bin Zayid, has publicly described the Brotherhood as a threat because “it does not believe in Other violent stresses and strains continue to tear the nation state”. at the fabric of national life. A total of 74 people were killed in fighting at a football stadium in Port Developments in Egypt will prove particularly Said in February 2012. Yet more rioting was influential in Syria, where the Brotherhood has a triggered when 21 perpetrators of the violence were historic role in opposition to Syria’s Assad and his sentenced to death. At one stage, military units sent father, most notably in 1982 when the Brotherhood’s to help the police face down the protesters actually attempt to lead an uprising in Hama resulted in a came into conflict with the police. Some fans’ terrible massacre by government troops. Morsi has groups oppose the Islamist government and the also sought to project an image as a regional clashes have taken on a political element. In statesman, visiting Iran last August, but his addition, an anarchist group, the Black Bloc, has vehement condemnation of the Syrian president, emerged since January, pledging to protect anti- while in the country, embarrassed his Iranian hosts, government protestors. as Syria is Tehran’s closest ally.

Regional implications Given the array of political and economic difficulties The success or otherwise of Egypt’s Muslim Brotherhood facing them, the pressure is now on the Muslim as a party of government will have lasting implications Brotherhood to create an inspirational vision of the for both Egypt and the wider region. Its failure could Egypt of the future. It seems unlikely that it will lurch destabilize Egypt, while its success will embolden the too far towards the more extreme Salafis. While their Muslim Brotherhood and other Islamist organizations to political support would be useful, more votes will be seek power elsewhere in North Africa and the Middle garnered from improving the country’s economic East, particularly in Libya and Tunisia. fortunes and that will undoubtedly require foreign investment. Potential foreign investors are unlikely to It could also encourage Islamists in Syria to push for be wooed by government based on a stricter military success and political power when – as seems interpretation of the Quran. probable – President Bashar al-Assad is driven out. As ever in the Middle East, a political revolution in one A big challenge for the Islamists would be how they react country has profound implications for the political and if they lose power. An electoral defeat to a liberal religious balance of power across 20 other states. alliance would test their commitment to democratic rule. Most revolutions are followed by periods of extreme Much may depend on the relationship between the reaction one way and then the other, like the pendulum Muslim Brotherhood and oil rich Gulf states. The two are on a clock. The Egyptian pendulum swings three ways: certainly allied religiously and Saudi Arabia has provided between more extreme Islamism and more liberal some funds to Cairo, but their political differences have government; between economic nationalism and a more come to the fore since the overthrow of Mubarak. open economy; and between Arab nationalism and Pan- Although its roots are in Egypt, the Brotherhood has Pan- Arab sentiment. There is still some way to go before the Arab aspirations; national Gulf rulers decidedly do not. real impact of the Arab Spring becomes clear.

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20 Energy Economist / Issue 378 / April 2013 Analysis International Gas

Gas glorious gas Shale gas and oil has increased the energy sector’s susceptibility to a belief in revolutions. Thanks to Japanese research, a new enfant terrible may be emerging, in the form of methane hydrates. Not only does the research highlight the dichotomy between the supposed consensus on global warming and the direction of technological innovation, but gas hydrates have their own special place on the Godzilla scale of disaster. Ross McCracken

Japan’s successful test in March of a methane hydrate the US holds maybe one quarter of the world resource, deposit offshore central Japan potentially opens up yet although estimates vary. another new vista for natural gas supply. Although still experimental, with highly uncertain and potentially disastrous In 2002, the Mallik Gas Hydrate Production Research environmental impacts, it is hard not to draw a parallel with Well Program, which took place on the Mallik gas the development of hydraulic fracturing, directional hydrate field in the Mackenzie Delta in Canada, proved drilling and the exploitation of shale and tight gas. for the first time that production from gas hydrates was technically feasible. The program involved the drilling of Although often described as a revolution – i.e. a three wells as part of an international research program, sudden tumultuous disturbance – shale gas in the led by Natural Resources Canada. United States took some 20 years of development before it had a significant effect on supply. It was The USGS completed its first assessment of the only then that it really had an impact on what might undiscovered technically recoverable gas hydrate be termed the market’s ‘consciousness’, and only resources on the North Slope of Alaska in 2008. It then did it achieve its revolutionary status. Its estimated the mean resource at 85 Tcf. It said there development outside of North America may appear was a 95% probability of 25 Tcf, 50% probability of 81 relatively slow, but perhaps only in comparison with Tcf and 5% probability of 156 Tcf. This represented gas the concertina image of US shale development that could be discovered, developed and produced using presented in the mainstream media. current technology.

Gas from methane hydrates remains years off, but Japan’s It was also the first time, according to the USGS, that production test represents a major step forward following gas hydrates had been assessed as a producible decades of collaborative international research. It is also a resource occurring in discrete hydrocarbon traps and reminder that shale gas is not the only supply-side front of structures. In its report, the USGS wrote, “Although technological development for gas. As with methane verified by only limited field testing, numerical production hydrate research, the success of shale gas has not put off models of gas hydrate-bearing reservoirs overlying the the development of Floating LNG, the technologically much Milne Point and Prudhoe Bay oil fields suggest that gas more complex equivalent of Floating Production Storage can be produced from gas hydrate with existing and Offloading units for oil, which also promises to open conventional technology.” up large new reserves of gas to commercial exploitation. An expedition by the USGS reported in late May 2009 the Methane hydrates results of a 21-day drilling program, which confirmed that Naturally occurring gas hydrates occur below ground gas hydrates can and do occur at high saturations within under particular temperature and pressure conditions. reservoir quality sands in the Gulf of Mexico. Formerly, They are found predominantly in Arctic continental areas most marine gas hydrates were thought to occur in sands and marine continental shelves. According to the IEA’s with little or no permeability. Highly saturated hydrate World Energy Outlook of 2010, methane hydrates make bearing sands were discovered in two of the three sites up 63% of the world’s potentially economically drilled. Gas hydrates were found in saturations ranging recoverable hydrocarbon reserves, a measure that from 50% to more than 90% in high quality sands in includes both conventional and unconventional oil, as close accordance with predictions. The drilling took place well as coal. Research has been ongoing internationally on Walker Ridge block 313 and Green canyon block 955 and there has been close collaboration between the and in the Diana subsea basin in the Gulf of Mexico. Japanese and US programs. In May 2012, a field test of the Ignik Sikumi gas hydrate A 1995 study that looked at the total gas hydrate deposit on the North Slope of Alaska was completed by resource in place put the potential US Alaskan resource a partnership of ConocoPhillips, the US Department of at 590 Tcf. This assessment also included federal Energy and the Japan Oil, Gas and Metals National offshore water not included in a later 2008 program. Corporation. Carbon dioxide and nitrogen was injected Research at the time put the total US methane hydrate into the well over a 12-day period and then backflowed resource at 112,765 Tcf (95% probability), with a mean for 21 days. Methane was produced immediately, rising estimate of 320,222 Tcf. Other research has suggested in abundance for two days before stabilizing. The USGS

21 Energy Economist / Issue 378 / April 2013 Analysis International Gas

said that the project provided a critical data set for gas far from land to make a pipeline commercially viable. hydrate production computer simulations and important While the challenges with methane hydrates are mainly insight into the design criteria for an extended downhole, those for FLNG are all on the surface. FLNG depressurization test in Alaska. vessels are far more complex than an FPSO. Crude oil is transported to land for refining, but natural gas needs to The multi-year Japanese project, with which the USGS is be processed offshore and then liquefied for transport. also involved, is the first to produce gas from an offshore hydrate deposit. The deposit lies about 300 As a result, FLNG vessels require a processing plant, meters below the seabed and in about 1,000 meters of designed for the particular characteristics of the field water. Last year, the Japanese researchers managed to gas, a liquefaction unit, storage tanks, turbines to power retrieve and store sediment samples for study by processing and liquefaction and the facility to make ship- replicating the sub-surface temperature and pressure to-ship LNG transfers. Unlike on land, space for all this conditions above ground that maintain the stability of equipment at sea is very limited, while everything has to the gas hydrates below ground. Depressurizing the work together in an environment of constant flex and hydrates below ground causes the methane to separate motion. It is a high cost endeavour and one that requires from the ice, facilitating its retrieval. innovations in LNG technology to succeed.

FLNG The two most advanced schemes are Shell’s Prelude FLNG is to gas what Floating, Production, Storage and project in the Browse Basin off northwestern Australia, Offloading vessels are to oil. FLNG would allow the which gained board approval in May 2011, and development of stranded offshore gas fields that are too Malaysian state oil and gas company Petronas’ FNLG facility off Bintulu, which was approved in June 2012. Gas hydrate production concepts Prelude is scheduled to come on-stream in 2017, while Petronas hopes to get its project up and running by 2015, an ambitious timeline by any standards. Floating platform The Prelude facility is designed to produce 3.6 million mt/year of LNG, 1.3 million mt/year of condensate and 400,000 mt/year of LPG. Shell has not released a CO2 CH4 Sea water capital expenditure figure for the project, but when it was approved the company indicated the cost would be Water depth around $10.8-$12.6 billion. Shell operates Prelude with of over 500-1000m a 67.5% stake, partnering Japan’s Inpex (17.5%), Korea Gas Corporation (10%) and Taiwan’s CPC (5%).

CH4 hydrate Petronas has already awarded an engineering, procurement, construction, installation and Free gas commissioning contract for its FLNG project to France’s CO2 hydrate Gas + water Hydrate inhibitors Technip and South Korea’s Daewoo Shipbuilding and such as sea water Marine Engineering. The vessel will be moored around 180 km off the coast of Bintulu and is designed to produce 1.2 million mt/year of LNG, which will monetize gas discovered at the Kinawit field, offshore Sarawak. Subsea completion

Petronas also last September awarded a FEED contract for a second project, a 1.5 million mt/year FLNG plant, Natural gas pipeline resting on the sea oor offshore Sabah, to a Japanese-led consortium, comprising Mitsui Ocean Development & Engineering Co., IHI, Toyo Engineering and US-based CB&I Nederland. FEED and cost estimates are expected to be complete by mid-2013. The gas will come from Sea oor-based Malaysia’s Rotan field, coming on-stream at end-2017, if natural gas production unit the company decides to go ahead.

Formation supplies heat Hydrate-bearing Chasing the leaders is France’s GDF Suez, which in for breaking down solid hydrate into gas and water sediment October gained some of the necessary environmental Dissociation zone: hydrate releasing gas and water approvals for a FLNG facility in the Bonaparte Basin offshore Australia. GDF Suez holds a 60% operating Sediment containing methane gas Recovered methane stake in the project. The remaining 40% is held by Australian exploration and production company Santos. Source: USGS, AIST Japan The Bonaparte FLNG facility would be located about 250

22 Energy Economist / Issue 378 / April 2013 Analysis International Gas

km west off the northern Australian city of Darwin. The Total hydrocarbon resource base project is expected to produce 2.0-2.5 million mt/year of LNG from the Petrel-Tern-Frigate gas fields. GDF expects Coal (10%) to make a final investment decision in 2014. Methane hydrates (63%) Natural gas (12%)

FLNG is being considered for other major offshore gas developments. For example, Japan’s Inpex expects to Shale oil (kerogen) (3%) complete Front-End Engineering Design for an FLNG Heavy oil and sands (5%) Deepwater and facility on the Abadi gas field offshore Indonesia in Ultradeepwater (0.04%) March 2014. Inpex has awarded dual FEED contracts to two engineering consortiums – one headed by Japan’s Enhanced oil recovery (1%)

JGC and the other by Italy’s Saipem. The Abadi LNG Conventional crude oil (6%) project is operated by Inpex, with 60%, Shell 30% and

Indonesia’s Energi Mega Persada 10%. Source: IEA World Energy Outlook 2010

FLNG remains an experimental combination of technologies support developers. The US has more land rigs than the in a new and challenging environment. In pursuing their rest of the world put together, and until the necessary respective projects, the companies involved are shouldering equipment and support services evolve in other considerable technological risk. Yet despite the high capital countries, shale gas exploitation is likely to remain cost, momentum behind the technology has not been lost relatively small-scale outside of North America. as a result of the expansion of shale gas production. If successful it will allow the development of a huge number FLNG by contrast is a big boys only game. The evolving of stranded gas resources and open up whole new areas technology is the preserve of a handful of oil and to exploration, but it still needs to be proven in practice engineering companies, no one of which has yet to put it and shown to be commercially viable. all together in a single package. Since it starts with offshore drilling, typically deepwater, the pool of Stacking the options potential users is limited to begin with. If successful, the FLNG arguably faces the least environmental barriers to technology is likely to be jealously guarded and traded widespread deployment, for two main reasons. First, it is only as a means of access to reserves. Project costs are offshore and thus doesn’t run into NIMBY resistance. counted in the billions. There is scope for reducing costs Second, it exploits conventional gas fields. In addition to in second or third generation projects, but by how much environmental concern over hydrocarbon extraction, the remains uncertain. immediate environmental impacts of shale gas are more visible and susceptible to popular protest. Fear, whether Methane hydrates are further behind, with development the risk is real or not, of contaminated water supplies, funded by a combination of public and private sector earthquakes or even heavy local traffic and despoilment capital. Costs are a large unknown, but it is not of the countryside, is highly emotive. impossible that it proves cheaper than either FLNG or shale gas in the long run. Although it is a matter of some Methane hydrates are potentially in a whole different speculation, gas hydrate deposits could be much more league. They are already of concern to environmentalists prolific than low permeability shale or tight gas fields and because as sea levels rise, relatively warm water heats not all countries need to go offshore straight away. up frozen tundra altering the stability of the hydrates and releasing methane into the atmosphere. The concern The fact that all three are progressing in tandem reflects with drilling is that in extracting the gas from the hydrate their individual drawbacks and possibilities. Methane deposit, the entire hydrate formation could become hydrates may seem a long shot, but where, as in Japan destabilized, causing, in an offshore situation at least, and South Korea, there is a high degree of import some form of subsea landslip that results in a massive dependency and no other domestic hydrocarbon options, release into the atmosphere of methane – one of the additional expense may be borne in return for security of most potent greenhouse gases. It is not yet possible to energy supply. Gas hydrates may prove a non-starter on quantify the risk, but the theory at least scores high on environmental grounds in some countries, while FLNG will the Godzilla scale of disaster. be readily accepted. It’s not a winner takes all situation.

Shale gas does best on ease of technological diffusion. A final observation is the dichotomy between the Shale gas technology can be bought and is not supposed consensus over climate change and the inherently that complex. It is fairly easily to replicate. It direction of technological innovation. Environmentally- involves relatively low capital entry requirements as can minded citizens will not be celebrating the new found be seen by the myriad of small companies active in its abundance of potentially recoverable gas, even if they development and deployment. A large number of foreign accept that gas is cleaner than either coal or oil. They companies have bought into shale production via joint will make a natural association between abundance and partnerships in the US. The real physical barrier lies in cheapness, and therefore consumption, even though use the development of shale gas service capacity to ultimately hinges on the cost of extraction.

23 Energy Economist / Issue 378 / April 2013 Analysis Black Sea Oil & Gas

Black Sea oil and gas Oil and gas exploration in the Black Sea has been overshadowed by large discoveries elsewhere. The region lacks support services, making deepwater drilling, in particular, expensive. Corruption, unstable political and regulatory environments complicate operations in many of the littoral states. Beyond the state-run operations of Ukraine, exploration remains piecemeal, last year’s significant gas discovery in Romanian waters notwithstanding.

Despite interest in exploration in the Black Sea and the southeast of the country and in the European one recent large gas discovery in the Romanian province of Thrace. Turkey’s state oil company TPAO sector, the under-explored region looks unlikely to signed a joint venture agreement with Shell last year burst on to the oil and gas scene anytime soon. A to explore for shale gas in the Diyarbakir region of number of campaigns in the Turkish sector appear to southeast Turkey. Test wells are expected next year. have been largely fruitless, leaving the Black Sea for the moment more important for the transit of oil and Unstable environments gas than for actual production. In international Both Romania and Bulgaria have difficult regulatory terms, the region has been overshadowed by the environments and are plagued by corruption. excitement generated by a series of large multi-Tcf Domestic market liberalisation has been slow and discoveries in Cypriot and Israeli waters in the East partial. In Bulgaria, the government was forced to Mediterranean and to an even greater extent by the resign in February in the face of street protests giant gas finds off Mozambique and Tanzania. about high utility bills, corruption and poverty. The country’s president has struggled to appoint a Although keen to expand their domestic production, caretaker administration acceptable to all sides and and with it independence from Russian gas imports, a general election is set for May 12. the littoral states of the Black Sea face a hard sell when it comes to attracting International Oil Blame, not necessarily justifiably (see Letter from Sofia), Companies. According to Rigzone, there are currently has been placed on energy market liberalisation, 14 offshore drilling rigs in the Black Sea, six of although the extent of that liberalisation is limited. The which are jack-ups and the remainder platform rigs government in Romania has taken note of its Bulgarian and therefore static. Twelve are managed by counterpart’s fate and full liberalisation in gas and Ukrainian state company Chornomornaftogaz, a power markets looks unlikely there until 2018 if not subsidiary of Naftogaz Ukrayiny, and are engaged in later, according to Sorana Parvulescu, an associate developing assets owned by Chornomornaftogaz director with Control Risks, speaking at the Black Sea offshore Ukraine and in the Sea of Azov. The only Oil and Gas Summit in Sofia in March. other two mobile rigs available in the area are managed by Romania’s GSP, and can only drill in Romania has the cheapest gas prices in the EU, while water depths of up to 300 feet. Bulgaria’s are about the third cheapest. Gas prices have been partially deregulated, but many consumers This means rigs have to be brought in from outside the continue to benefit from subsidized prices and the region through the Bosporus, a laborious and expensive subsidies are an important electoral tool. Gas sold at process. Large rigs cannot fit underneath the bridges below production cost creates little incentive for inward that span the strait. Jack-ups have their legs cut off and investment in the sector and creates debts amongst the top of the derrick removed. Semi-submersibles, like state companies that starve them of the money required the Liev Eiriksson, also have drilling towers lowered and to invest in aging infrastructure. replaced once in the Black Sea. This adds substantially to mobilization and demobilization costs. There is If Bulgaria’s current lack of a government and pending currently insufficient drilling in the region to sustain the election leaves policy highly uncertain, institutional full-time presence of even one high specification drillship stability in Romania isn’t much better. Parvculescu said or semi-submersible. As a result, Black Sea wells are the energy agency in Romania had been moved many expensive and IOCs – the companies with the funds and times between ministries, with the average length of an expertise to drill deepwater wells – often have better energy minister’s tenure being just 18 months since prospects in their international portfolios. 1990. The ANRM, Romania’s mineral resources regulator, has had five presidents since 2006 and the Offshore prospects elsewhere are not the only ANRE, the energy regulator, seven since 2005. distraction, Romania, Bulgaria, Ukraine and Turkey Corruption remains a problem in both countries. all have potentially large shale gas reserves. The Turkish Association of Petroleum Geologists In Romania, there have been 15 new laws or announced in March, for example, that the country amendments to primary legislation governing the energy had an estimated 1.8 Tcm of shale gas reserves in sector since 2007, according to Parvulescu. Only in

24 Energy Economist / Issue 378 / April 2013 Analysis Black Sea Oil & Gas

Black Sea maritime boundaries

MOLDOVA UKRAINE

Chisinau RUSSIA Odessa

ROMANIA Simferopol Dzhubga Sevastopol Yalta Sochi GEORGIA

Constanta Bucharest Batumi

Black Sea Varna

Trabzon BULGARIA Burgas Samsun

Istanbul TURKEY International border GREECE

Source: Platts

January the new government hit gas producers with a Arkhanhelske and Holitsynske fields in the past two series of additional taxes designed to raise funds for years. According to the Black Sea Association of infrastructure investment and subsidize vulnerable National News Agencies, Chornomornaftogaz plans consumers from rising gas prices. The taxes entered to develop seven new fields, re-equip two existing into force February 1 and will apply until the end of fields, and triple its total production from 1.056 Bcm 2014. A windfall tax of 60% is to be levied on profits last year to 3 Bcm in 2015. accrued by domestic gas producers from gas price deregulation after the deduction of royalties and To expand its exploration capacity further, Naftogaz upstream investments. A new royalty regime is to be Ukrayiny last year awarded a tender for two semi- introduced from 2015. submersible rigs from Singapore’s Keppel Fels at a cost of $1.226 billion. The rigs will be able to drill in water Exploration and production depths up to 1,000 meters and are to be delivered by Ukraine is also plagued by political instability and end-2014. The rigs will be customized for the Black Sea corruption. Offshore activity is led by state-run environment and harsh weather conditions. Chornomornaftogaz, which reported in March a 31.7% year-on-year increase in gas output in January Outside of this, foreign company involvement in the and February. ChornomorNaftoGaz has recently Ukrainian sector has been stymied by political purchased two modern jack-ups, each for about instability and rancorous disputes over contracts. US $400 million, a price tag that caused a scandal in Vanco International was awarded a Production the country and led to allegations of corruption, but Sharing Agreement to drill offshore in 2006 only to at least their presence increases the drilling capacity see the PSC later abolished. The PSC was reinstated of the company substantially. in February, following the approval of an agreement between Ukraine and the development consortium in The company aims to increase offshore gas output a Stockholm court of arbitration. to 1.65 Bcm in 2013. The first rig, Petro Hodovanets, started operations at the Odesske deposit June 1 The consortium, Vanco Prykerchenska, comprises Vanco last year, while the second Nezalezhnist, began International, DTEK Holdings Limited, Shadowlight operations in early February. The Odesske gas field Investments Limited, which is owned by Russian is one of the largest offshore deposits in Ukraine businessman Yevgeniy Novitsky and Integrum and estimated by the government to contain about Technologies Limited, an Austrian investment group. 21 Bcm of gas. The field alone is expected to DTEK is owned by businessman Rinat Akhmetov, a long- produce more than 600 MMcm of gas in 2013 and time ally of Ukrainian President Viktor Yanukovych. The more than 1 Bcm in 2014, according to agreement between the consortium and the government ChornomorNaftoGaz. should now open the way for drilling.

The company is also finalizing development of the Although Ukraine offers some highly prospective Shtormove deposit and has developed the blocks, it is Romania that has delivered the most

25 Energy Economist / Issue 378 / April 2013 Analysis Black Sea Oil & Gas

promising discovery of recent years. Announced in indicating a total of 22 meters of gas-bearing Late 2012, the Domino-1 well in the Neptun block is Cretaceous sandstones. estimated to hold around 1.5-3 Tcf of gas. The field is held jointly by OMV and ExxonMobil and was the Romgaz has also acquired a 10% stake in a project led first deepwater exploration well offshore Romania, by Russia’s Lukoil to explore and develop the Est drilled 170 km offshore in water depth of 3,000 ft. Rapsodia and Trident blocks. Under the deal, Lukoil will transfer 8% of its stake and existing partner Vanco OMV said at the time, “should further work confirm International 2% of its holding to Romgaz. After the technical and commercial feasibility of deep completion of the deal, Lukoil will hold a 72% stake and water gas production from the Neptun block, further Vanco International 18%. Lukoil is currently carrying out investment during both the exploration and a seismic survey of the blocks. The Est Rapsodia and development phases could reach several billion Trident blocks are 60-100 km from the coast in water dollars with the potential for first production toward depths ranging from 90 to 1,000 meters. the end of the decade at the earliest.” OMV upstream chief Jaap Huijskes said that additional In the Bulgarian sector, France’s Total signed a deal with wells would be drilled, but that production would be the Bulgarian government to explore for oil and gas in “some time off.” the Khan Asparuh block last year. The deepwater offshore license, spreading over 14,220 sq km, is ExxonMobil and OMV clearly believe that further located about 80 km off the Bulgarian coast. Total has a discoveries are likely. In October, the two companies 40% interest in the block, working in partnership with agreed to buy 85% of the Midia Deep license from OMV (30%) and Spain’s Repsol (30%). Canada’s Sterling Resources and its partner Petro Ventures Europe, while Romania’s state gas producer Speaking in Sofia in March, Total’s Geoscience Advisor Romgaz will take up its 10% option in the license if a Jean Baptiste Gouges said that the company would commercial discovery is made. Midia Deep is adjacent to acquire and evaluate seismic on the block between 2012 the Neptun block. Sterling reported in November that its and 2014 in order to define drilling locations. A drilling highly anticipated Ioana-1 well on the block had found campaign comprising two wells would then take place in natural gas, but the poor reservoir quality meant the find 2015-2017. This suggests that, if successful, production was not commercial. from the block would be unlikely until 2020 at least.

However, Sterling Resources did make a discovery with Despite bullish predictions by Turkey’state oil and gas its Eugenia-1 well in the Pelican block with the jack-up company TPAO that Turkey’s Black Sea littoral holds GSP Jupiter, which it announced in December. The volumes of hydrocarbons sufficient to make Turkey a net Eugenia-1 well reached a total measured depth of 2,276 exporter of crude, to date drilling results have been meters, Sterling said, with preliminary log analysis disappointing. The only commercial reserves identified in the Turkish section of the Black Sea is the tiny Akcakoca gas field in shallow water off the coast of Eregli, which produces around 700,000 cubic meters per day. ] [ELECTRIC POWER ] Over the past decade TPAO has conducted separate joint venture explorations in its Black Sea blocks with BP, Petronas, ExxonMobil and Chevron. No formal ENERGY IN EAST EUROPE results have been released, but none of the wells drilled are believed to have identified commercially exploitable reserves. All four companies ended their partnerships. A Every two weeks, Energy in East Europe brings you all the news and spokesman for Turkey’s energy ministry said in February analysis of the major developments in the region’s energy sector. that TPAO’s most recent Black Sea partner Chevron had From in-depth project reports to company profiles, as well as the paid a $100 million penalty after it opted to exit its joint latest policy initiatives and changes, Energy in East Europe provides a venture without drilling a second well as agreed. comprehensive briefing on the constantly changing energy markets. Turkish hopes now appear to center on Block 3920, Coverage includes: Electricity, natural gas, coal and oil market which lies off the province of Thrace. TPAO last intelligence; reports on projects and players; Policy initiatives September said it had struck gas in its Istranca I well and implementation; Investment opportunities and tenders; East drilled on the block in water depths of 80 meters, with European currency tables. the gas discovered in Miocene-age sandstone 3,650 meters subea. TPAO signed an exploration agreement For more information, please contact the Platts sales office nearest you; with Shell to prospect on the block in February. The E-mail: [email protected] 50:50 joint venture will see Shell invest $150-200 North America Europe & Middle East Asia Pacific Tel: 800-PLATTS-8 (toll-free) Tel:+44-20-7176-6111 Tel:+65-6530-6430 million in a 3D seismic survey of 150,000 sq km of +1-212-904-3070 (direct) seabed. The agreement also calls for Shell to drill at least one well during the three years of the agreement.

26 Energy Economist / Issue 378 / April 2013 Events

Forthcoming conferences and events

Ecobuild China Ecobuild India International Forum of Biomass April 1-3 April 16-18 Combustion Shanghai, China Mumbai, India April 24-25 www.ecobuildchina.com www.ecobuild-india.com Krakow, Poland http://spalaniebiomasy.pl/en/iii- IEEE Green Technologies Conference 3rd Annual Arctic New Frontier forum-of-biomass-combustion.html April 4-5 Exploration Forum Denver, USA April 16-18 Emerging Shale Plays USA 2013 http://ieeegreentech.org London, UK April 24-25 3rd Annual European Gas Forum www.marcusevans.com Houston, USA www.emerging-shale-plays-usa-2013. 2013 LNG 17 com April 4-5 April 16-19 Prague, Czech Republic Houston, USA Clean Power Asia www.oilgas.flemingeurope.com/ www.lng17.org April 29-30 european-gas-forum Bangkok, Thailand World CTL 2013 Conference www.cleanpower-asia.com Global Power Markets Conference, April 16-19: 28th Annual Shanghai, China Powering Africa: Mozambique April 8-10 http://www.2013.world-ctl.com/ May 2-3 Las Vegas, USA Maputo, Mozambique Argus European Biomass Trading www.platts.com www.energynet.co.uk April 17-18 Power & Electricity World Africa London, UK Optimising Enhanced Oil Recovery 2013 www.argusmedia.com/euro-biomass 2013 April 8-11 May 7-8 World Clean Coal Week, India Focus Johannesburg, South Africa Doha, Qatar April 18-19 http://atnd.it/V9GPo3 www.wplgroup.com/aci/conferences/ New Delhi, India 4th Annual FPSO eu-eor3.asp http://www.szwgroup.com/ April 8-11 wccwindia2013/ Argus Turkish Power and Gas Trading Singapore, Singapore May 8-9 tp://www.fpsoconference.com European Power Generation, 4th Istanbul, Turkey Annual 5th Annual Offshore Drilling Rigs www.argusmedia.com/Events April 22-23 April 8-11 Dusseldorf, Germany Middle East Downstream Week Singapore, Singapore www.platts.com May 12-15 http://www.offshoredrillrigs.com/ Abu Dhabi, UAE 2nd Eastern Mediterranean New Wind Energy O&M Summit USA www.wra-medw.com Frontiers Forum April 9-10 April 22-23 Crude Oil Summit Dallas, USA London, UK May 13-14 www.windenergyupdate.com www.marcusevans.com London, UK 3rd European Biomass to Power www.platts.com April 10-11 19th Western African Oil, Gas & Krakow, Poland Energy Week 19th Latin Upstream http://www.wplgroup.com/aci/ April 22-24 May 15-17 conferences/eu-ebp3.asp Windhoek, Namibia Rio de Janeiro, Brazil http://www.petro21.com/ www.petro21.com/events/?id=793 Power and Energy Systems – AsiaPES events/?id=794 April 10-12 Platts European Bunker Fuel Phuket, Thailand The 6th Energy Storage Forum – Conference, 4th Annual www.iasted.org/conferences/home- Europe 2013 May 23-24 800.html April 23-25 Amsterdam, Netherlands Berlin, Germany www.platts.com Global Oil and Gas Crisis www.energystorageforum.com Management and Emergency APPEA 2013 Conference and Response Gas Week Exhibition April 11-12 April 23-25 May 26-29 Barcelona, Spain Brussels, Belgium Brisbane, Australia http://www.3dent-media.com www.gasnaturally.eu http://appeaconference.com.au Rockies Oil & Gas, 7th Annual Coal Upgrading & Conversion 36th Euroheat & Power Congress April 15-16 April 23-26 May 27-28 Denver, USA Singapore, Singapore Vienna, Austria www.platts.com www.coalupgrade.com www.ehpcongress.org Small Hydro European Algae Biomass 2013 Tight Oil Reservoirs California 2013 April 16-17 April 24-25 May 29-30 Vancouver, Canada Vienna, Austria Bakersfield, USA www.arena-international.com/ www.wplgroup.com/aci/conferences/ www.tight-oil-monterey-california-2013. smallhydro/ eu-eal3.asp com

27 Energy Economist / Issue 378 / April 2013 Letters Letter from Johannesburg: March 2013

Letter from johannesburg: March 2013 BHP’s power deal exposed Never before has a simple electricity bill caused so much trouble; it has created angst in the boardroom and threatened companies and thousands of jobs at one of the world’s biggest resources companies. A court decision coupled with a pending public hearing has revealed that BHP Billiton’s South African smelters are getting electricity for less than a fifth of the cost charged to the rest of the country and below the cost of production. For years, multi-national miner, BHP hid behind a client confidentiality clause in its contract with South Africa’s national power generator Eskom to protect the details of its sweetheart power deal. The contract for cheap electricity was signed in 1992 and began functioning in 1995 to supply power to BHP’s mighty Hillside aluminium smelter in Richards Bay in South Africa’s KwaZulu Natal province and its sister plant Mozal in Mozambique. Between them, they suck up nearly 10% of Eskom’s annual output, equal to the consumption of a large city. Buoyed by its cheap electricity, BHP planned to smelt 750,000 mt of aluminium at its Richards Bay operations, largely for export to Europe. Around 30% of aluminium smelting costs are made up of power and the idea was for BHP to import alumina from its Australian mining operations to process in South Africa. The contract was signed in the days when South Africa was awash with cheap, plentiful, energy and didn’t know what to do with it. As the years wore on and electricity steadily became more scarce and expensive in Africa’s biggest power producing country, accusing eyes turned on the BHP deal. Many executives and journalists knew for years that domestic and industrial users were, in effect, subsidizing BHP’s output, but few knew exactly by how much. The issue became a cause celebre taken up by veteran business journalist Jan de Lange, who fought for four years through the courts in search of the truth. On a warm autumn morning in Bloemfontein, in the Free State, on March 15, came the denouement. The judge of the Supreme Court ruled that the public interest in the BHP deal was sufficient for it to be published. The price of the cheap electricity is calculated through a formula based on the price of aluminium and the exchange rate of the Rand to the dollar. Under this formula, Hillside was paying 22.65 cents per kWh (0.024 US cents/kWh), compared with R1.40/kWh paid by domestic users. The cost to Eskom of production is 41 cents/kWh. BHP now faces another hammer blow – a public inquiry and the threat of a revision of this contract. The national regulator NERSA has confirmed that it will hold the public hearing by end-April and will decide by end-May whether the contract with Eskom must be reviewed. The company could challenge the decision in the High Court. “The regulator will no doubt consider the legalities of the special pricing arrangements included in the contracts, whether they are fair, reasonable and in the national interest, or whether they are unreasonably discriminatory and prejudicial to other customers of electricity in South Africa,” Chris Yelland, an independent energy analyst with EE Publishers, said. Kesagee Nayager, a spokesman for BHP, admitted that the aluminium business had been fighting stiff competition in recent years, which would be made even more difficult by a review of the contract with Eskom. “We hope NERSA will set the matter aside after the hearings, if it doesn’t it will make it more difficult to run the plants,” Nayager said. The threat of paying higher tariffs for electricity looms large in the mind of BHP managers. Sources in the company say it would consider selling Hillside and Mozal if a new higher price for electricity was set. The cut price deal was meant to run until 2028. “Who would want to buy it?” de Lange said. “Let’s face it both Hillside and Mozal were losing money even with the cut price power deal. The BHP aluminium group lost $285 million in the last six months of 2012 and $291 million in the year to June 2012. If I were BHP I would put the smelters into mothballs and maintenance.” BHP has been struggling against competition from western China, which boasts some of the cheapest electricity in the world and has become a low cost net exporter of aluminium. The furore around the Eskom contract means tough times ahead. “These kinds of contracts do have to be approved by NERSA and were approved at the time, so the question is were they wrongly approved, were there errors of judgment? We wait in anticipation for the public hearing. If NERSA is to cancel the contract it could have very serious implications. This contract was approved by the regulator years ago. If NERSA cancels the contract and says it made a mistake, BHP could have grounds to sue for damages, Yelland said. “They are not making money as it is; if they were paying the amount that other users are paying they might consider shutting down their smelting business. If the contracts are cancelled it will be damaging to South Africa as a foreign investment destination,” he added. The threat to jobs couldn’t come at a worse time. South Africa is losing tens of thousands of jobs a year at a time when the government has pledged to create five million over the next five years. Whatever happens at the public hearing, the issue could find its way back to court. Another blow to South Africa’s image in the eyes of the world investment community and another blow to the image of the way the country handles and sells its precious power. — Chris Bishop

28 Energy Economist / Issue 378 / April 2013 Letters Letter from Sofia: March 2013

Letter from Sofia: March 2013 Domestic devils On the rare occasions when the workings of power and gas markets do intrude on the public consciousness, they can do so with some force. Blackouts are the usual culprit; long years of mismanagement accumulate in a preventable crisis that has dramatic visible and physical effect on voters, one that can bring governments down. However, in Sofia, it has not been blackouts that have sparked unrest, but massively elevated utility bills landing on citizens’ doormats. Protesters say these bills have in some cases been up to six times the level of last year, rising for a rural pensioner from a monthly bill of BGN 50 ($33.3) to BGN 300 in January. Such a dramatic and uncontrolled rise in prices would cause uproar anywhere and, in Bulgaria, coupled with long-standing grievances over corruption and poverty, it produced street protests and the resignation of the government in February. As many commentators have pointed out, Bulgaria has some of the lowest gas, power and heat prices in the EU, but is also the poorest country in the EU. According to the National Statistical Institute, households in 2008 were paying 14% of their income on water and energy bills. In comparison, the UK defines consumers as suffering from energy poverty when this proportion reaches 10%. The impact of the price rises in January was huge when compared not with tariffs in other EU countries, but in terms of disposable income. In a country where there has been little economic revival following the financial and Eurozone crises, this was more than enough to bring protesters out on to city streets. The electricity distributors sending the offending bills, CEZ and Energo-Pro from the Czech Republic and Austria’s EVN, have been subject to a popular backlash. EVN Bulgaria had two of its service vehicles torched outside its headquarters in Plovdiv in February. They have justified the higher bills on a number of counts; a price increase of 14% was agreed with regulators last summer, and this appears to have been accentuated by colder than normal winter weather, resulting in higher power and heat demand. EVN Bulgaria said a longer than usual settlement period also added to bills. Some observers have blamed insufficient market liberalization, others too much. Previous reforms certainly fell short of producing genuine competition at the retail end, instead creating what are in effect three regional monopolies – CEZ in the west, EVN in the southwest and Energo-Pro in the north east. The privatization process itself has also come under suspicion. Both EVN and CEZ in March felt it necessary to publish the contracts governing their Bulgarian operations in an effort to counter claims that they had been guaranteed high, fixed levels of returns on their investments at the expense of consumers. The allegation that these companies are extracting hugely inflated rents on the back of monopolies has clear appeal to populists, one made all the easier to swallow as they are foreign companies. However, according to a report on the country’s energy sector by the Center for the Study of Democracy, price regulation in fact falls most heavily on the distribution companies, rather than on the many other elements in the supply chain. Bulgaria’s energy sector problems are home grown rather than imported. The report painted a picture of a largely corrupt energy sector controlled by a small elite interested primarily in draining funds into private pockets. It identified three areas heavily exposed to the risk of corruption, which would cause undue financial burdens on end consumers: poorly regulated and badly accounted for claims for investment at the generation level; the high level of dependence on imports from monopoly producers, and in particular the terms of the contracts governing supply; and the lack of transparency regarding the export of electricity. For example, the National Electricity Company has gone from a position of exporting electricity directly to the use of a number of intermediaries, apparently giving up profits in the process. The emergence of these ‘traders’ has even been lauded in some quarters as a positive product of liberalization on the assumption that more traders can only equate to more competition. The report said: “The NEC annual reports for 2004 and 2005 reveal that the average export price per kWh of NEC was less than 0.1 eurocent above the price on the domestic market, in spite of the much higher price on the international market.” In all subsequent annual financial reports, NEC states how much it has exported and across which border, but provides no information on the revenues gained from these transactions. It is clear that the street protests of February and March go beyond utility bills. Although a severe grievance in themselves, they have become a lightning rod for other issues, primarily corruption and control of the economy by ‘oligarchical interests’. Protestors are railing against what they see as a mafia state, which has gravitated towards the returns available from the lucrative energy sector. The privatised, foreign distribution companies find themselves in the invidious position of being the debt collector of last resort and thus the target of protest. The opposition is heavily fragmented and appears to contain elements that back much greater market liberalization and elements that favour renationalisation, with the latter in ascendency; the aim they have in common is to wrest control of the economy from a corrupt elite. The formation of an interim caretaker administration ahead of elections to be held on May 12 has proven extremely difficult. However, given the opposition’s lack of organization and a clear political platform, there is no certainty new elections will bring either an end to the current period of political instability, or a genuine change in the control of key sectors of the Bulgarian economy. — Ross McCracken

29 Energy Economist / Issue 378 / April 2013 Letters Letter from Moscow: March 2013

Letter from Moscow: March 2013 Chinese agreements Moscow and Beijing signed a total of 35 documents during talks in late March that were described as “constructive” and held in “a trust-based, well-wishing and business-like atmosphere,” according to Chinese President Xi Jinping. “The fact that the new Chinese leader is making his first foreign visit to our country confirms the special nature of the strategic partnership between Russia and China,” Russian President Vladimir Putin said in an interview released by the Kremlin ahead of Xi’s arrival. The accords signed March 22 in Moscow were a long time coming: speculation over increased Russian crude supplies to China has been ongoing for months, and in the case of the Russian gas deliveries, years. But they are still not set in stone. State gas company Gazprom signed a Memorandum of Understanding with CNPC that envisages the beginning of pipeline gas supplies to China in 2018 at a rate of 38 Bcm a year. The 30-year agreement includes a possible increase in volumes up to 60 Bcm/ yr, Gazprom CEO Alexei Miller said. Under the MOU, the gas will be piped via the so-called “eastern route” from East Siberia. Gazprom had expected to sign a final contract on supplies of 30 Bcm/year of pipeline gas over 30 years via the western route, from West Siberia to western China, in mid-2011, but it was repeatedly delayed as the parties failed to agree on price. The latest timeline for determining the price and signing the contract is the end of this year, although Gazprom Chairman Viktor Zubkov said March 27 that he expects an agreement on price regarding the eastern route supply deal in June. Both supply deals still require definitive contracts, which in turn rests on the so-far elusive meeting of minds on price. In an inkling of the direction in which negotiations are going, Miller said there is a possibility of pre- payment for the gas supplies, which could be used for the development of the Chayanda field in East Siberia. Chayanda is seen as a key source for pipeline gas supplies to China. Chinese finance also plays a key role in underpinning oil contracts. One of the most significant agreements was for Russian state oil giant Rosneft to more than double crude supplies to China to 31 million mt/year (around 625,000 b/d) from 15 million mt/year at present. On the eve of Xi’s visit, Rosneft CEO Igor Sechin did not rule out that Rosneft’s supplies to China could eventually grow to as much as 50 million mt/year. Rosneft is set to boost crude supplies to China by 800,000 mt this year, before “gradually” increasing them to a peak of 31 million mt, Sechin said. The new agreement envisages crude supplies for 25 years. The exact schedule needs to be arranged in conjunction with the development of delivery infrastructure, Sechin said, adding that additional solutions would be needed to expand transportation capacity. Earlier in March, Russia’s energy minister Alexander Novak said Russia was considering adding a second line to the Skovorodino-Mohe pipeline, which would double its capacity to 600,000 b/d. Skovorodino-Mohe is the offshoot to China from the trunk ESPO crude pipeline that runs across East Siberia to the Russian port of Kozmino on the Pacific coast. Supplies under the current deal for 15 million mt/ year a year started in January 2011 and was supported by a $25 billion loan from the China Development Bank to Rosneft and Russia’s state-owned oil pipeline company Transneft. The loan was agreed in 2009. Rosneft has used the new crude supply agreement to attract an additional $2 billion loan from the China Development Bank, Sechin said. Describing the new credit line as having “very good conditions” for Rosneft, Sechin added that the additional financing would be directed toward the development of fields. Following the completion March 21 of its $55 billion deal to buy TNK-BP, Rosneft is now the world’s biggest publicly-traded oil company, but it has also assumed huge levels of debt from the TNK-BP deal. As analysts at Citi pointed out the new agreement should allow Rosneft to exchange “substantial amounts of short-term debt with the long-term variety at good rates.” Noting that China doesn’t necessarily make a superior client in terms of pricing, particularly for oil delivered from West Siberia, Citi said it was a different story when it comes to financing. “Few customers have the capacity to make forward payments in the sheer volumes that China can, and Rosneft needs to be able to convert its substantial amount of short-term debt and bridging loans taken on as a part of the TNK-BP purchase into longer-term, affordable obligations,” the analysts said. Rosneft and CNPC also agreed to expand their upstream cooperation. The two agreed to develop jointly three offshore projects in Russia’s Arctic waters – the West Prinovozemelsky, Medynsko-Varandeysky and South Russkoye blocks in the Barents and Pechora Seas, as well as eight projects in East Siberia and the northern Nenets region. In addition, the two countries signed an intergovernmental agreement on a stalled project to build a refinery in the port city of Tianjin on China’s eastern coast, Rosneft said. The project will now include a petrochemical complex, which the partners expect to boost significantly the project’s economic viability. — Nadia Rodova

30 Energy Economist / Issue 378 / April 2013 Letters Letter from Washington: March 2013

Letter from Washington: March 2013 More is less Three years ago, Congress directed the National Research Council to investigate whether the country could cut oil use and greenhouse gas emissions in the light-duty vehicle sector by 80% by 2050. The NRC has delivered its report and said yes, but it won’t be easy. Achieving those levels of reductions would require not only technical breakthroughs and a broad suite of sustained government incentives, but a degree of consumer arm- twisting – in other words taxes. The NRC analysis examined the potential for natural gas, electric, biofuel and fuel-cell vehicles — as well as high-efficiency gasoline and diesel engines — to capture an increasing share of the light-duty vehicle market in the coming decades. “Several scenarios are promising, but strong and effective policies emphasizing research and development, subsidies, energy taxes or regulations will be necessary to overcome cost and consumer choice factors,” the authors concluded. The report suggested that policymakers in Washington implement “feebates,” a combination of rebates for autos with higher fuel-efficiency standards — in excess of 90 miles per gallon — and taxes on low fuel economy vehicles. The report also suggested policymakers consider a tax on fuel to keep prices high and discourage consumption, and consistent funding for advanced vehicle research and development. Hitting the target of cutting GHG emissions 80% by 2050 will be even more difficult than cutting oil use, the report found. If a large portion of the petroleum cuts came through the use of Compressed Natural Gas vehicles, then it would be impossible to hit the GHG-reduction targets, the report said. The report came just days after President Barack Obama gave a major energy speech in which he called for a $2 billion federal trust fund for advanced vehicle technology research and development. The White House said it will pay for the fund — $200 million per year for ten years — through production increases on offshore tracts already open to drilling, and through reforms to streamline the permitting process in those areas, which will be revealed in the administration’s fiscal 2014 budget request, expected in early April. White House officials have also said that the funding of the proposal is a “design detail” to be worked out with Congress, but the general idea is that increased oil and gas revenues will be used to pay for developing their technological replacements. It is an idea that might just get the oil lobby onside so long as they demonstrate limited long-term vision. They already seemed to have driven down a side-track Heather Zichal, Obama’s chief White House energy and climate-change adviser, reiterated the funds would come only through a rise in revenues from areas already open to drilling under the current offshore plan, which expires in 2017. No new areas would be opened, she told reporters — a comment that set off pro-drilling groups. “Today’s statement from the White House reinforces the frustrating truth: the federal government is intentionally ignoring potentially vast oil and gas resources. It is foregoing potentially billions in additional revenue,” said Randall Luthi, the president of the National Ocean Industries Association, an industry trade group. “Any additional diversion of existing offshore revenues merely drives up the federal deficit,” Luthi added. “Only new access brings new revenue. This hardly sounds like an all-of-the-above strategy to me.” The American Petroleum Institute, the oil industry’ largest and most influential Washington-based trade group also said Obama’s plan should include increased access to offshore areas for oil and gas drilling. “Eighty-three percent of federal lands and waters are still off limits to oil and natural gas development. By failing to unlock new areas for energy production, the president’s plan misses a golden opportunity to create jobs and generate billions of dollars in government revenue,” said Erik Milito, API’s group director for upstream and industry operations. Some senior lawmakers made the same case. Senator Lisa Murkowski, the senior Republican on the Energy and Natural Resources Committee, along with Senator Mary Landrieu, a Louisiana Democrat, had earlier unveiled a bill to increase the share of revenue from offshore oil and gas development that goes to coastal states. “The difference from what he is proposing and what I am proposing is that I would get the seed for the trust fund from new production,” Murkowski said. This somewhat misses the environment message behind the trust fund plan, but environmental groups have also noted the problems inherent in co-opting the oil industry into its own demise. They have faulted Obama’s plan for increasing oil production and greenhouse gas emissions, even though the increases would pay for more research into technologies to wean the US off oil. Environment America, a Boston-based advocacy group, said the proposal “promises to save the United States from its dependence on oil by deepening its dependence on oil.” But some are optimistic that the opposition to Obama’s plan could fade, and eventually bring industry and environmentalists together to support it. “For industry, this would be good news, even if existing royalty revenues were put into this fund, because it would deter some of their traditional opposition from going after whatever the current lease program is,” said Michael Levi, an energy fellow at the Council on Foreign Relations. “Part of the virtue of this sort of strategy is that it ties the fortunes of two sides that have for decades been at each other’s throats, and helps lock in what each of them want.” — Staff

31 Energy Economist / Issue 378 / April 2013 Letters Letter from Brussels: March 2013

Letter from Brussels: March 2013 Cash-strapped EU mulls 2030 targets A cash-strapped EU is about to start debating what energy and climate targets it should have for 2030, as part of its long-term goal to decarbonize its economy by 2050. The European Commission plans to publish a green discussion paper on the EU’s 2030 energy and climate framework March 27, along with a progress report on reaching the EU’s 2020 renewables target and a consultation paper on the future of Carbon Capture and Storage technology in Europe. Back in 2007, during the pre-crash good times, EU leaders committed for the first time to binding 2020 renewables and emissions targets as part of a push to combat climate change and increase EU energy security. The EU also has a non-binding target to improve its energy efficiency by 2020. The EU adopted the binding targets in 2009, just as the financial crisis overtook energy and climate change on the EU’s political agenda. The Commission recognizes this in a draft of the green paper seen by Platts, which says that the 2030 framework will have to take account of the impact of the financial crisis, cash-strapped governments and businesses, and consumer worries about rising energy prices. The availability of emerging technologies, such as renewables, shale gas and CCS, plus “the varying levels of commitment and ambition of international partners in reducing... emissions,” are also important factors, it added. The Commission still faces many of the same issues that it faced when it developed the 2020 targets, particularly on how to develop targets which fairly reflect EU countries’ differing resources, industrial structure and comparative wealth. The main change since 2009 is that the richer EU countries are no longer as rich, while some of the poorer EU countries are struggling to avoid financial collapse. The Commission said in its draft that the EU countries which need the most investment and with the most options for cost-effective emission reductions, renewables development and energy efficiency improvements often struggle to afford to them. Some of these countries also find it hard to win domestic support for changes in industrial processes and energy use that impact jobs, the Commission said. This is a barely-veiled reference to Poland, which runs on cheap, local coal and has been a strong opponent of EU low-carbon policies. But all EU leaders, including Poland’s, committed in 2009 to cut emissions by at least 80% from 1990 levels by 2050. The Commission said that the 2030 framework “must be sufficiently ambitious to ensure that the EU is on track to meet longer term climate objectives.” Improving access to finance could help boost public and political support in the EU countries facing the most difficulties in moving to a low-carbon economy, it said. Another option is differentiated national targets, as in the 2020 targets. This might improve fairness, but could also increase the overall costs of achieving the EU’s goals unless there is enough flexibility in meeting them, for example through trading, the Commission said. The Commission is inviting views on possible 2030 targets, instruments, how best to promote competitiveness and security of supply, and how to share the efforts fairly. For example, it asks what the 2030 energy and climate targets should be, whether they should apply at EU, national or sectoral level, and if they should be legally binding. The consultation runs to June 19, and the Commission plans to bring out formal legislative proposals before the end of the year. More than just carbon cutting EU energy policy must be about more than just cutting carbon, EU energy commissioner Gunther Oettinger told the European Parliament’s energy committee March 19. “I’m talking about innovation, new sources of energy like wind, solar, marine energy. We have to move on from experiments,” he said. Energy policy had social impacts, he said, with affordability impacting both industry and consumers as well as the wider economy. “We have to see environmental and energy policy as equal partners,” Oettinger said. “We need three [2030] goals: emissions, renewables and energy efficiency,” he added. But he said he was open to debate on what form these should take, such as whether there should be specific targets for electricity and/or transport, for example. Oettinger is also still backing CCS as part of the EU’s energy and climate strategy. EU leaders committed in 2007 to fund up to 12 CCS demonstration projects by 2015. But six major EU projects have already been canceled and others have stalled in the planning process. Projects are struggling to get off the ground as EU carbon prices remain below €5/mt, far below the €40-70/mt the Commission estimates CCS projects need to be viable. “CCS has to be part of the equation to meet [climate reduction] targets,” Oettinger told a conference in Brussels March 5. “I hope we can realize two of the demonstration projects next year, [including] the ROAD [in the Netherlands],” he added. “We don’t need six or more but we need one demonstration project to get more input for research to make CCS a functioning technology.” The Commission is set to invite views on how to kickstart CCS in its consultation paper expected March 27, including possible legislation. This could include emission performance standards, CCS certificates, or mandatory obligations to fit CCS, according to a draft seen by Platts. — Siobhan Hall

32 Energy Economist / Issue 378 / April 2013 Market News Oil

Market News

China reforms oil product pricing mechanism

China has announced long-awaited reforms to its The NDRC said it would continue to hand out existing oil product pricing mechanism. The National subsidies to sectors and industries that were vulnerable Development and Reform Commission said that it will to higher oil prices, including farming, fishing, forestry shorten the adjustment window for retail oil product and public transport. At the same time, the commission prices from 22 days to 10 days, as well as abolish the announced that it is reducing gasoline and diesel retail 4% trigger point in the fluctuation of a basket of three prices by Yuan 310/mt and Yuan 300/mt, respectively, crude prices used to review the retail prices. effective midnight March 27. This translates into a Yuan Under the existing pricing mechanism, the NDRC can 0.23/liter cut for RON 90 gasoline and a Yuan 0.26/liter review and adjust regulated prices of gasoline, gasoil cut for diesel at the pump, the NDRC said. It last and kerosene if the 22-day rolling average of a basket of adjusted prices February 25, when it raised retail Cinta, Dubai and Brent benchmark crude prices rises or gasoline and diesel prices by Yuan 300/mt and Yuan falls by more than 4% from the previous price 290/mt, respectively. adjustment. In addition, the NDRC will also make In a research note, Bernstein Research said the changes to the types of crudes that are currently linked announcement “should lead to more stable refining to oil product prices, it said. “Appropriate adjustments in margins and an end to the significant refining losses the types of crude will be made based on changes in during periods of oil price inflation.” However, it pointed domestic crude imports,” it said. out that the reform “does not take away the “With China’s crude oil imports expanding in government’s ability to intervene if there is a significant recent years, the dependence on foreign oil reached spike in oil prices or inflation.” 57.8% in 2012 and all parties believe that the Chinese refiners have suffered huge losses as a principle of the existing oil pricing mechanism had result of domestic oil product prices not keeping pace been geared toward more market-oriented reform,” with international crude prices. The China Petroleum & the NDRC said. “But the actual implementation Chemical Corp. (Sinopec), the country’s largest refiner, presented problems, with a lengthy price adjustment said earlier that more frequent retail product price period that did not adapt fast enough to fluctuations changes last year had helped it narrow its refining in oil prices,” it added. segment loss by 68.1% to Yuan 11.4 billion in 2012. “According to the guidelines of the new policy, oil However, this still represents a huge bill for subsidizing product prices will be adjusted every 10 working days. If domestic oil product prices. Rival PetroChina reported they are meant to fall, prices will be reduced, and if they earlier that its total refining loss was Yuan 33.67 billion are meant to rise, they will be increased,” the NDRC said. last year, down from Yuan 60 billion in 2011. Vice- However there are two exceptions. Prices will president Liu Hongbin said the company was currently not be adjusted if the resulting change is less than still suffering a loss of $8.70/b. Yuan 50/mt ($8/mt) – or equivalent to Yuan 0.05/ Retaining the ability to intervene reflects government liter. The price change will instead roll over and concern with the impact on inflation in times of high be reflected during the next adjustment. Secondly, price volatility. However, shielding consumers from if inflation increases dramatically, an emergency international prices through subsidies can also result in occurs or when international oil prices are hugely higher demand than would be the case if price increases volatile over a short period, the NDRC said it may are passed on more directly, meaning, in China’s case, suspend or delay oil product pricing adjustments. a more rapidly growing dependence on oil imports.

Country-by-country breakdown of OPEC production (million b/d)

Country February January December November October September August July Algeria 1.180 1.190 1.200 1.200 1.200 1.200 1.210 1.220 Angola 1.800 1.790 1.780 1.700 1.720 1.700 1.750 1.650 Ecuador 0.500 0.500 0.500 0.500 0.490 0.490 0.490 0.490 Iran 2.700 2.700 2.700 2.700 2.720 2.720 2.750 2.900 Iraq 3.100 3.000 2.980 3.230 3.210 3.180 3.100 3.050 Kuwait 2.800 2.800 2.820 2.800 2.800 2.800 2.800 2.800 Libya 1.390 1.400 1.450 1.480 1.500 1.480 1.450 1.450 Nigeria 2.060 2.120 2.050 1.950 2.000 2.050 2.280 2.200 Qatar 0.740 0.750 0.770 0.770 0.780 0.780 0.790 0.790 Saudi Arabia 9.200 9.250 9.450 9.820 9.850 9.850 10.000 10.000 UAE 2.630 2.630 2.630 2.630 2.600 2.600 2.620 2.600 Venezuela* 2.320 2.320 2.320 2.300 2.300 2.300 2.300 2.300 Total 30.420 30.450 30.650 31.080 31.170 31.150 31.540 31.450 Source: Platts

33 Energy Economist / Issue 378 / April 2013 Market News Oil

Canada advances Arctic E&P prospects

The Canadian government has made two moves that could against devolution, said they fear that the NWT spur renewed Arctic oil and natural gas exploration, by government will give greater priority to oil and gas transferring control over land and resource development to activity than the socioeconomic and environmental the Northwest Territories and setting the stage for a impacts of those projects. He questioned whether bidding round in the region’s most remote location. consultation could be meaningful when the terms of Canadian Prime Minister Stephen Harper announced devolution have already been negotiated. in March that the Northwest Territories’ will take control The deal coincides with a fresh attempt by in April 2014 over development of its resources and the Canadian government to end an exploration qualify for millions of dollars of taxes, revenues and drought over the past four decades in the adjoining royalties. Some of the revenues will also go directly to Nunavut Territory. Aboriginal Affairs and Northern the five NWT aboriginal governments that have signed on Development Canada has invited companies to to the devolution agreement-in-principle. The Canadian nominate lands in the Arctic archipelago for a future government will keep ownership of offshore resources, lease auction. AANDC said the Bent Horn oil field – notably the Beaufort Sea, but will open negotiations on which yielded 2.8 million barrels of oil in 1985-1996 revenue-sharing within 60 days of a final agreement. – would be included in a bidding round. NWT Premier Bob McLeod said the final pact is The region attracted drilling activity in the 1970s expected to be signed after his government has held when oil prices were high and the Canadian government community information sessions. He said the offered a bundle of exploration incentives. The boom agreement, which has been decades in the making, resulted in the discovery of 16 fields in the Sverdrup would allow the NWT to keep 50% of resource revenue Basin containing an estimated 300 million barrels of oil up to an annual limit of C$60 million ($58.4 million), and 14 Tcf of natural gas, including the two largest with 25% of that amount going to native governments. undeveloped gas fields in Canada that hold a combined McLeod said the NWT, one of Canada’s three 9 Tcf. But all were deemed too distant from markets to territorial governments, should have the same rights as support commercial development. Canada’s 10 provinces to “develop and market our Bent Horn on Cameron Island, about 1,000 miles natural resources without being held up in a regulatory from the North Pole, provided crude for several annual logjam. The irony is that the NWT has vast oil and gas trial shipments to Petro-Canada’s Montreal refinery to resources, but still has to import fuel.” test the economics and quality of the crude. However, At the top of his action list is the Imperial Oil- the field was abandoned before Petro-Canada was taken operated Mackenzie Gas Project to develop an over by Suncor Energy. established 6 Tcf of Mackenzie Delta gas for southern AANDC spokeswoman Michelle Perron said that Canadian and US markets. The project got bogged down Nunavut nomination calls were held on a yearly basis in in six years of regulatory delays and has been overtaken 2000-2009, but no interest was received and no by the emergence of shale gas. McLeod said that if auctions were held. She said that depending on the there is no North American market for the Mackenzie industry response, bidding for exploration or significant gas, the NWT should have the right to explore other discovery licenses could be held in May after options, including the export of that gas as LNG to Asia. nominations close April 24. Perron said the call gives Former NWT premier Stephen Kakfwi, spokesman for potential bidders an opportunity to identify blocks of land the two aboriginal governments that are holding out they would like to see posted for bidding.

US adds 1.8 million b/d of new oil pipeline capacity in 2013

The US will add 1.8 million b/d of new oil pipeline Energy. The basin also extends over a portion of New capacity this year, and 1.1 million b/d of that capacity Mexico. Texas production is expected to grow to 1.18 will terminate in the Gulf Coast. “It’s not surprising that million b/d by 2014. Bentek Energy is a division of Platts. oil differentials are improving in the Permian and Bakken Currently, there is 900,000 b/d of capacity out of the with additional takeaway capacity, both in pipeline and Permian Basin, but those pipelines terminate at Cushing, rail,” Robert W. Baird senior analyst Hsulin Peng said. Oklahoma, where a glut of crude persists. The 400,000 Traders attributed the strength in WTI Midland and b/d Enterprise Products Partners-operated Seaway WTS crude to demand caused by shippers filling Pipeline, which runs to Jones Creek, Texas, from Cushing, Magellan’s reversed Longhorn pipeline. The pipeline, Oklahoma, has started to chip away at the excess. which runs from Crane, Texas, to Houston, is expected Takeaway capacity in the Bakken Shale has greatly to move a least 75,000 b/d of crude to Houston initially outpaced the region’s prolific production, and crude-by- and will increase to the full 225,000 b/d capacity in rail terminals there are nearly 50% underutilized. Total mid-2013. The line fill is expected to involve 950,000 outgoing shipping capacity for Bakken rail loading barrels of WTI Midland crudes. facilities is near 975,000 b/d, but only about 500,000 Current production in the Texas portion of the Permian b/d moves on railcars from the terminals, RBN Energy Basin is near 1.06 million b/d, according to Bentek analyst Sandy Fielden said.

34 Energy Economist / Issue 378 / April 2013 Market News Oil

PDVSA reports heavy oil progress ahead of snap election

Venezuela’s state-run PDVSA and Italy’s Eni have Chavez inheritance brought on stream the first production from their giant It is uncertain how the death of President Hugo Chavez Junin-5 heavy oil field in eastern Venezuela nine months March 5 will affect the country’s oil policy. A snap ahead of schedule, Eni said in March. The company said election has been called for April 14. The national PetroJunin, its joint venture with PDVSA, had flowed oil electoral council set the poll date one day after Nicolas from the field which forms part of the Faja del Orinoco, Maduro, Chavez’s handpicked successor, was sworn in Venezuela’s massive heavy oil deposit which holds the as acting president in a ceremony largely boycotted by world’s biggest reserves of untapped oil. Oil minister the opposition, which slammed it as unconstitutional. and PDVSA President Rafael Ramirez said initial Shortly after the date was set, the main opposition production was 700 b/d. coalition announced it had unanimously chosen Henrique The Junin-5 block, which lies some 550 km Capriles, who lost to Chavez in the October election, as southeast of Caracas and covers an area of 425 square its unity candidate again. Before Maduro was sworn in, kilometers, holds 35 billion certified barrels of oil Capriles denounced the inauguration as a “constitutional equivalent in place. PDVSA holds a 60% ownership stake fraud” and abuse of power by the government. in the project with Eni controlling the remaining 40% Maduro has vowed to press on with Chavez’s interest. Eni said the partners plan to increase revolution, an oil-funded policy that has provided production to some 15,000 b/d by year-end and then to massive and popular health, education and housing 75,000 b/d by early 2015 by drilling about 180 wells. programs to the poor while angering the wealthy with The second phase full development of the field will expropriations and nationalizations. A recent survey by bring production to 240,000 b/d by end-2018, Eni said, pollsters Hinterlaces gave Maduro a 14-point advantage adding that over the expected 40-year life of the field over Capriles, though the opposition leader has nearly 1,500 wells are planned. The diluted crude from questioned the firm’s reliability in the past. Junin-5 will be transported to a planned 350,000 b/d Ramirez told assembled state oil company workers in refinery in Jose, where it will be processed and March that he will continue to follow the oil policy of converted into oil products, including diesel, naphtha Chavez “always,” a source told Platts. “His best legacy and LPG, for export. The PetroBicentenario refinery is to was his thinking on petroleum,” Ramirez said. be built in the Jose Industrial Complex. The Paris-based International Energy Agency said a “We continue with our strategic goal of increasing victory for Maduro could lead to “further degradation” of production to 4 million b/d,” Ramirez said, referring to PDVSA. However, the IEA suggested that any new leader PDVSA’s overall targets for the year. “We are creating was likely to continue Chavez’s policy of using PDVSA to the conditions to achieve an investment goal this year of fund social programs, leaving the Venezuelan oil sector $25 billion.” Venezuela says it is producing about 3 facing “enormous” challenges, including severe million b/d currently, although most analysts put the underinvestment by the state oil company and decaying figure much lower. Platts’ latest estimate was for 2.32 infrastructure. million b/d in February. Venezuela, once a large exporter of refined products, Meanwhile, Venezuela and Chevron were set to sign in became a net importer of gasoline under Chavez, while late March an agreement for the US oil company to loan crude production fell by some 700,000 b/d between PDVSA $2 billion to be used to boost output from their 1998 and 2012, the IEA said. The agency noted that the Petroboscan heavy oil joint venture, according to Ramirez. “renationalization” of upstream contracts, whereby Chevron said in late February in a filing to the US PDVSA in 2007 took a majority interest in projects, had Securities and Exchange Commission that it was finalizing forced a number of international oil companies to leave the details of a deal with Venezuela for a loan to be the country. Production elsewhere in Venezuela was repaid in future Petroboscan crude sales. The company subsequently undermined by the partial nationalization did not specify the amount, but sources in Venezuela had of oil service companies and takeover of assets in previously told Platts it would be for $2 billion. 2010, it said. Sources also said the talks were about altering the Development of the Orinoco heavy oil belt is well terms of a long-term, low-interest loan agreement with behind schedule, mainly because of lack of funding from Chevron reached in July. Under that deal, which wasn’t PDVSA, the IEA added. It said project timelines for the finalized, PDVSA said it would pay back $2 billion through six major contracts remained “stubbornly vague,” adding 2025 at an interest rate equal to LIBOR plus 4.5 points. that “token amounts” of production from some Orinoco Chevron did not disclose the financial details at that time. projects had been announced ahead of last year’s Chevron said in the SEC report said that its total share election, but apparently added up to “only a few of production from Petroboscan, its 30% interest in the thousand barrels a day.” The agency said estimates for Petropiar affiliate that operates the Hamaca heavy-oil Orinoco output had held in a steady range of just below project in the Orinoco oil belt and a 25.2% interest in 400,000 b/d because of “chronic” operating problems Petroindependiente was 68,000 barrels of oil equivalent/d, and despite initial output last September from the made up of 64,000 b/d of liquids and 27,000 Mcf of 200,000 b/d Petromacareo joint venture with natural gas. Chevron said that it invested $1.261 billion in PetroVietnam and the 45,000 b/d Petromiranda project Petroboscan and $952 million in Petropiar in 2012. with Russian partners Rosneft and Lukoil.

35 Energy Economist / Issue 378 / April 2013 Market News Oil

Libya starts oil and gas law revisions

Libyan oil minister Abdel-Bari al-Arousi has attended the and its subsidiaries in restoring oil production to near first meeting of a committee charged with reviewing the normal levels in the wake of the civil war. Output was oil and gas law and drafting new legislation to manage cut to near zero during the rebellion after foreign oil development of Africa’s largest crude oil reserves. companies evacuated staff and shut down operations. Libya’s National Oil Corporation said on its website that The country produced an estimated at 1.39 million Arousi directed the committee to “produce a new b/d in February, according to the latest Platts survey of petroleum law that is free of the complications inherited OPEC production, down from November output of 1.48 from the previous regime in a way that would serve the million b/d. This was due to sporadic security Libyan people and take account of recent developments disturbances and strikes targeting oil installations during in the new Libya while encouraging foreign and private what is proving a challenging transitional period for the sector investment.” new Libyan leadership. There was no mention of the so-called EPSA IV Exploration activity has been relatively muted with Production Sharing Agreement, but sources familiar with several foreign operators saying they would await a the negotiations said Tripoli is seriously considering revision of the petroleum law and the amendment of changing the terms of the contracts that foreign oil EPSA IV terms before committing to a drilling program. operators say do not offer attractive commercial returns. The attack against Algeria’s In Amenas gas facility in NOC said only that the committee, made up of January has been another deterrent for foreign oil lawyers, engineers, economists and both Libyan and companies concerned about security in North Africa. BP, foreign experts, was charged “with studying and which had signed an exploration and production deal reviewing the national petroleum laws to standardize the with NOC in 2007 worth at least $900 million, said in exploitation of Libya’s oil wealth, both onshore and February that its drilling plans were under review as a offshore, and prepare a new oil and gas law that takes result of the In Amenas attack by Islamist militants. into account developments in the energy sector both Libya produced an average 1.6-1.7 million b/d before inside and outside the country and prepare a the rebellion and, if capacity is to be boosted, it will comprehensive draft for a new law.” It will also need an injection of new foreign investment that existing determine the “role of the national oil companies and legislation does not encourage. NOC has in the past incorporate that in a unified law that complies with decade secured more attractive terms for itself under international laws applied by [OPEC].” revised Exploration and Production Sharing Agreements Foreign oil operators have been waiting for a change at the expense of its foreign partners. The last revision following the ouster of Moammar Qadhafi in October produced EPSA IV, which imposed tougher terms on 2011 after an eight-month rebellion that ushered in a foreign operators and led some companies like Shell to new government. The new government includes an oil withdraw from an exploration commitment last year. ministry for the first time. Qadhafi had scrapped Libya is targeting an increase in oil production to 1.8 ministries in his so-called Jamahiriya or state of the million b/d by the end of this year and Libyan officials masses style of government. One challenge for the new have said that they plan to launch a new licensing round authorities is the definition of the oil ministry’s role focusing mainly on gas when the review is completed. given that state-owned NOC had been running the energy The biggest foreign operators in Libya include Italy’s Eni, sector in the absence of a ministry for decades. Wintershall of Germany, France’s Total, Repsol of Spain Libya, which has 47.1 billion barrels of crude oil and the Waha Group comprising US companies Amerada reserves, succeeded largely through the efforts of NOC Hess, ConocoPhillips and Marathon.

HRT spuds first well off Namibia

Brazilian oil company HRT has started drilling the first of Companies active offshore Namibia are gearing up for a 10 operated blocks off Namibia. The company, in a new exploration campaign this year. The ministry of energy’s statement March 25, said it had spudded the Wingat-1 petroleum commissioner, Immanuel Mulunga, said 10 wells well on petroleum license 23 in Walvis Bay. The well, also are expected to be drilled in the next two to three years. known as 2212A/07, will be drilled by the semi- Spain’s Repsol, with UK partner Tower Resources, is likely submersible Transocean Marianas and is expected to take to follow HRT and drill the first well in the 9.3 billion barrel 60 days to reach its targeted depth of 4,100 meters. Delta Prospect in license 0010 later this year, he said. Portugal’s Galp has a 14% participating interest in Namibia has no proven oil resources, but experts the first three wells to be drilled, two in license 23 in the believe it is a promising new frontier with geology similar Walvis Basin and one in license 24 in the Orange Basin. to Brazil’s. Companies are targeting pre-salt HRT said the three prospects contain combined accumulations in the hope of replicating the billion barrel recoverable reserves of approximately 8 billion barrels. discoveries made in Brazil. West Africa may even offer “We are really confident in the start-up of the exploratory better opportunities as the pre-salt targets are located in drilling campaign offshore Namibia,” HRT’s CEO Marcio less extreme depths, while the seas off West Africa are Rocha Mello said. much more benign than those off Brazil.

36 Energy Economist / Issue 378 / April 2013 Market News Gas

Ukraine negotiating non-Russian gas imports

Ukraine is negotiating to import 20 Bcm of gas this year Russia in 2013. Stavitsky’s comments to Platts indicate via western Europe, effectively slashing its imports from Ukraine may be interested in importing as little as 15 Russia by more than half, according to Energy and Coal Bcm of gas from Russia this year. Industry Minister Eduard Stavitsky. “We are now Ukraine already faces problems with Russia over its conducting negotiations,” said Stavitsky, who was in refusal to pay some $7 billion in penalties which Tbilisi for the Georgian Oil and Gas conference. “We Gazprom is demanding because Ukraine has in recent think we can succeed in transporting gas from Europe years chosen to take delivery of much less gas than through reversing pipelines,” he said. Gazprom says had been contracted. Stavitsky said Stavitsky said that so far in March Ukraine had not Ukraine stood firm in its rejection of the $7 billion imported a single cubic meter of gas from Russia, which demand. “We think that this process is unfair. We are last year supplied the country with almost 33 Bcm of clearly stating to Russia that this is unfair. We don’t gas. Ukraine’s most recent purchases, at the start of want to give Russia anything and we will stand firm on the year, had resulted in the state gas company, Ukrainy this point. This practice was instituted by Russia and is Naftogaz, paying Russia’s Gazprom $530/1,000 cubic not in accordance with good neighborliness with meters, whereas there was gas for sale in Europe at neighboring states. There are some legal norms that $380/1,000 cu m. “We are paying $530 per 1,000 cu allow us to stand firm.” m – it’s the highest price in Europe,” Stavitsky said. The minister said deliveries from European suppliers When asked about a provision in the 2010 Russia- could be achieved through reversal of a cluster of Ukraine gas agreement that provides for Ukraine to pipelines connecting Ukraine with Hungary, Slovakia, receive a $100/1,000 cu m discount, Stavitsky Poland and Romania. “Our system allows us to do that. responded: “It is not a direct discount. The minister said We invested in the technical capacity of the pipelines to the discount was the cost paid by Moscow to allow it to allow them to operate in reverse mode.” He continued: base the Russian Black Sea fleet at a naval base in the “We have a big market. If we solve the issue of diversity Ukrainian port of Sevastopol in the Crimea.” He added of supply we will have good competition. Maybe our that this payment for stationing the Russian fleet “is not friends from Russia will offer us a good price.” for free; so we don’t count it.” In 2012, Ukraine received Stavitsky also commented on Ukraine’s quest to almost all of its imports from Russia, with official secure gas imports from Turkmenistan. He said: “We Ukrainian statistics recording that imports from Germany have a serious focus on the resumption of supplies of accounted for just 52.7 million cu m worth $21 million, Turkmen resources to Ukraine. Today we are holding very while Russian deliveries totaled 32.927 Bcm and were serious negotiations with our Russian counterparts as worth $14.0 billion. the only realistic prospect [for importing Turkmen gas] is Ukraine has previously indicated its determination to via Russia. We do hope that in the first half of this year reduce Russian imports, but never by as much as we will have success in these negotiations.” Stavitsky currently envisages. On February 22, President At present, Ukraine commonly receives Turkmen gas Viktor Yanukovich, declared on television: “We’ve found in its deliveries from Russia, but these have actually a way to supply gas from Europe. We’ve signed a been purchased by Ukraine from Russia.Ukraine wants contract for 5 Bcm with RWE and [will] quietly pump to be able to negotiate directly with Turkmenistan on gas.” On the same date, Vadym Chuprun, the deputy both price and volume issues and simply to pay Russia chairman of Ukrainy Naftogaz, said the state-owned a transit fee for use of the Russian pipeline network to company was looking to buy just 18-20 Bcm gas from implement such deliveries.

Russia bound to export LNG

Russia will extend the right to export Russian LNG to consortium comprising Societe Generale, Gazprombank producers other than Gazprom, the president of the and Sberbank plans to seek finance of up to $18 billion. Russian Gas Society Valery Yazev said in March. Yazev Novatek owns an 80% stake in the project and is also deputy chairman of the State Duma. France’s Total holds the remaining 20% share. A final Gas producers have been urging the government to investment decision on Yamal LNG is expected this year, break Gazprom’s monopoly on LNG exports in order to with commissioning of the first train slated for early make project financing easier. So far though they have 2017. Yamal LNG includes three trains, each with a had to accept the idea of Gazprom as an agent. capacity of 5 million-5.5 million mt/year. However, without a direct contractual link between a The energy ministry initially expected to decide on domestic producer and its foreign importer, there is too whether or not to extend access to LNG exports by the much risk to tempt banks into making a major loan. end of 2012, but these and later deadlines passed Daily Izvestiya reported that the consortium of banks without any decisions being taken. A senior official at organizing the funding for Yamal LNG plans to seek up Gazprom Export told Platts in March that there were two to $5 billion if the law is not changed, citing sources in commissions considering the question: one under the the energy ministry. If the law is amended the president and one under the prime minister.

37 Energy Economist / Issue 378 / April 2013 Market News Gas

Japanese utilties look to diversify LNG supplies

Japan’s Kansai Electric is in talks for supply deals with reserves, as a prospective supply source, Matsumura various prospective LNG export projects in the US and said the lack of relevant legal frameworks could slow the Mozambique, according to a senior company official. The start-up of projects in the country. Anadarko has said it talks come at a time when a number of Japanese power expects the Mozambique project to see its first two trains, and gas utilities are increasing efforts not only to with capacity of 5 million mt/yr each, on-stream in 2018. diversify their supply sources, but also price benchmarks Matsumura said his company has also held talks to in a bid to cut import costs as well as enhance security buy from three US projects in which Japanese of supply. companies are involved – Freeport, Cameron and Cove Kansai Electric “has had a number of talks” with Point. “We have been clearing hurdles to accept lean Mitsui and Anadarko to buy LNG from their project in gas-based LNG by testing our power generation facilities Mozambique, Naoto Matsumura, general manager for as well as our tank operations,” Matsumura said. the company’s Office of Fossil Fuel, said. Kansai Electric Among the companies eying LNG from the US are – the fourth Japanese utility after Tokyo Gas, Osaka Gas Chubu Electric and Osaka Gas, which have tolling and Tokyo Electric Power to confirm it is negotiating to agreements to take up to 2.2 million mt/yr each from buy from the Anadarko-led Mozambique project – could the Freeport LNG project; Sumitomo and Tokyo Gas, join a consortium of Japanese buyers. “We are still which are in discussions to take a combined 2.3 million uncertain about the conclusion of our talks [with Mitsui mt/yr from the Cove Point project; and Mitsubishi and and Anadarko],” Matsumura said. “However, we do not Mitsui, which are eying 4 million mt/yr each from the deny the possibility of forming the consortium.” Cameron project. The Freeport, Cove Point and Cameron While Kansai Electric, Japan’s second-largest power projects all need approval from the US Department of utility, does not doubt Mozambique, with its vast Energy to export to non-FTA countries such as Japan.

Sasol to start regulatory process for Alberta GTL plant

South Africa’s Sasol plans in late April to file an application Calgary’s Talisman Energy in late 2010 signed with Alberta Sustainable Resource Development for an a C$1.05 billion deal with Sasol to develop environment impact statement of its plan to build a Gas-to- unconventional natural gas assets at Farrell Creek Liquids facility in the province, Martin Waterhouse, country and Cypress areas at the Montney basin in northern president for Sasol Canada said in March. Waterhouse British Columbia. Under the deal, the companies added that the company is also buying land in Alberta’s also agreed to initiate a feasibility study to build a industrial area near Edmonton to build the plant. GTL plant. Talisman in June said it was exiting the The 526-hectare site had been owned by Total E&P planned facility citing commercial reasons. Canada, which planned to build a 200,000 b/d heavy oil “We continue to work with Talisman on the upstream upgrader in the province. “We have already completed a side and seeking a joint venture partner for the GTL feasibility study and are now carrying out a pre-FEED facility to fill in the void created by them [Talisman] is [front-end engineering and design] study for our 96,000 not a priority for us now,” Waterhouse said, adding “We b/d plant, to be built in two phases each of 48,000 currently have three rigs running in the Farrell Creek area b/d,’ Waterhouse said, at the Canadian Energy Research and also plan to drill three to four wells at Cypress. In Institute 2013 Natural Gas Conference. well drilling and completion costs, as our upstream “About 71% of the final product will be diesel, partner Talisman has been able to bring down costs by followed by naphtha at 26% and LPG at 2%. Under the 15% year-on-year.” first phase development, the diesel will be marketed in Sasol Canada’s parent in December said it was western Canada, while the naphtha could be used by putting on hold by at least a year a final investment Alberta’s oil sands producers as diluents for transporting decision on the planned Alberta GTL facility. The their bitumen [through pipelines],” Waterhouse said. The reason cited by Sasol was that the company’s plans planned project will utilize from 1 Bcf/d of feedstock to build a similar facility in Louisiana would take gas, which it plans to source from British Columbia. precedence. Waterhouse did not put a price tag of the planned “The US GTL plant will have a capacity of 96,000 GTL project, but industry officials have indicated it to be b/d and we are now proceeding with the FEED study. about C$5 billion ($4.8 billion). That estimate looks very The Alberta project is scheduled behind it. We are due to low in comparison with the $18-$19 billion cost of commission this year a 33,000 b/d GTL facility in Shell’s GTL plant in Qatar, which has nameplate capacity Nigeria and also are investigating the possibility of an of 140,000 b/d of oil products and 120,000 b/d of oil expansion of our 32,400 b/d GTL Oryx plant in Doha, equivalent of ethane. Pearl started up in 2011. Qatar. We have a technological lead in the industry that EGTL, a GTL project in Nigeria, which with Sasol is also we would like to maintain,” Waterhouse said. He did not involved, is expected to cost more than $8 billion and give a specific time line for building the Alberta GTL provide capacity of just 33,000 b/d. It is expected to come facility, but indicated the next stage would be a FEED on-stream this year well behind the original schedule. study that would take 21 months.

38 Energy Economist / Issue 378 / April 2013 Market News Gas

Morocco set for a series of exploration wells

Morocco is set for a rise in drilling activity this year. Current plans suggest production from the Rharb “Currently, 30 International Oil Companies are partnering permits could average 7 million standard cubic/day of with ONHYM, including majors, independents and super- gas, sustained for at least five years. An extensive independents,” according to the state-owned company’s drilling program of a least five and possibly up to nine director of exploration, Mohammed Nahim. exploration wells is planned during 2013. The country produces little oil and gas at present, In February, US Plains Exploration & Production said importing 75% of its gas needs and 99% of its oil, making it planned to spend $15 million on the 2.7 million-acre it one of Africa’s largest importers of oil and gas. Its offshore Mazagan license. The company said an energy bill was a crippling $10.7 billion in 2011. Energy independent audit showed the area may contain more demand has risen by around 54% in the last 10 years. than 7 billion barrels of recoverable reserves. Plains To attract International Oil Companies, the expects to drill two wells by 2014. government is offering fiscal terms that are among the Anglo-Turkish Genel, through a combination of farm-ins most competitive in the world, Nahim said. IOCs benefit and acquisitions, has established a material position in from a 10-year corporate tax holiday, while royalty rates Morocco. Genel estimates its Cap Juby block has the vary between 7% and 10% for oil and between 3.5% and potential to deliver 250 million barrels and plans to drill 5% for gas. There are also exemptions from many taxes its first well in the fourth quarter of this year. Genel also including VAT. ONHYM’s participation is limited to 25% has 60% of another nearby block in the region known as maximum. Blocks are currently awarded on a first come, Sidi Moussa, where it is targeting a resource of more first served basis. than 850 million barrels of oil equivalent. The first Morocco is under-explored relative to its oil and gas exploration well is scheduled for the first half of next year. rich North African neighbors. It has seen just 309 Cairn Energy has six operated offshore blocks with a exploration wells drilled to date. A total of 273 wells combined acreage of 8,500 square kilometers. It have been drilled in the onshore sedimentary basins anticipates drilling in the Forum Draaa blocks this year with most of the drilling carried out in the 1960s and where it is partnered with San Leon Energy, Serica 1970s. Only 36 wells have been drilled in the offshore Energy and Longreach Oil & Gas. Atlantic and Mediterranean coast, most spudded in the UK-listed Chariot expanded its Africa portfolio same period. last year with the acquisition of a 75% interest The government also wants to develop its shale gas in the Loukos, Casablanca/Safi and Rabat deep resources, which are located near Tangiers, Timahdit offshore blocks in October 2012. A 3D seismic and Tarfaya, where Petrobras and San Leon Energy hold survey is anticipated in 2014 with drilling possible rights. ONHYM estimates that the total oil content of the in 2016. The company believes the northern margin deposits, which were discovered in the 1960s, could be of Morocco to be analogous to the conjugate Nova 50 billion barrels, with 15 billion barrels at Timahdit and Scotia basins where significant discoveries have 22 billion barrels at Tarfaya. been made in the same play systems. Tangiers Petroleum announced in March that a Fastnet Oil & Gas in November 2012 raised $18 detailed 3D seismic program at its Tarfaya offshore million in share placing to fund its drilling program. block could be “company making” after data confirmed The company plans to drill its first well in the Foum potential for 750 million barrels of recoverable oil. Assaka licence area, which is operated by Kosmos Gulfsands Petroleum in December said it was spending Energy, in the fourth quarter of the year. The latest at least $19 million exploring for “highly prospective oil company to join in the hunt for hydrocarbons and gas” in the north of the country. It expects to see in Morcocco was Chevron when its signed an substantial development and exploration activity start on agreement in January for a 75% interest with ONHYM the Rharb Centre and Rharb Sud permits this year. in three offshore concession areas.

EIA cuts natural gas production and price forecasts

The US Energy Information Administration in March reduced its 2014 forecast 21 cents to $3.63/MMBtu. lowered its 2013 natural gas production forecast by Looking at the near term, the agency lowered its first- 420,000 Mcf/d from February to 69.6 Bcf/d, and cut its quarter Henry Hub spot price outlook by 3 cents to 2014 outlook by 320,000 Mcf/d to 69.64 Bcf/d. The $3.36/MMBtu and its second-quarter call by 14 cents to EIA reduced its total marketed gas production forecast $3.29/MMBtu. for the current quarter by 600,000 Mcf/d from its The EIA cut its forecast for 2013 gas February outlook, to 69.43 Bcf/d, while also lowering its consumption by 290,000 Mcf/d to 70.02 Bcf/d and gas price expectations for the quarter and the year as it its 2014 gas-use forecast by 30,000 Mcf/d to 69.96 forecasts a drop in power generation demand. Bcf/d. Both residential and commercial gas use are Despite the lower-than-expected gas output, EIA expected to rise in 2013 and 2014, but this will be dropped its Henry Hub spot price call for 2013 by 12 more than outweighed by falling demand from power cents from its February outlook to $3.41/MMBtu and generation.

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Indonesia formulating coal production controls

Indonesia’s Energy and Mineral Resources Ministry is product will no longer be treated as a commodity, drafting a regulation to control the country’s coal but as a national energy source for the long-term. production to arrest an accelerated depletion of its “As a policy, coal is treated as a commodity. There reserves, according to Edi Prasodjo, coal director at the is no change about this. As a commodity, coal is a country’s directorate for minerals and coal. Prasodjo source of income for the state in terms of tax and said in an interview that the impact of the planned non-tax revenues,” Prasodjo said. “If we treat coal regulation on Indonesia’s coal exports will be studied, as a source of energy that will support Indonesia’s but national interest to preserve coal reserves for longer requirement in the long-term, it is important to use by future generations should take priority over the control production,” he said, adding, “To change concerns of international coal buyers who may be the current policy, Indonesia has to impose controls dependent on Indonesian coal for power generation. from upstream coal industry players.” He said coal industry players and related government The coal director said Indonesia’s 2005 national coal agencies are being consulted in relation to the drafting policy, based on five international studies, set of the regulation and it may take at least two years Indonesia’s 2025 production at 220 million mt. Coal before it is issued. “It is within Indonesia’s right to production in 2011 and 2012 were 357 million mt and control its coal production,” Prasodjo added. 387 million mt, respectively. If controls are not imposed Xavier Jean, an analyst with Standard & Poor’s, said total coal production could shoot up to 500 million mt by the regulatory environment is likely to become more 2025, he noted. “At the rate coal is being produced in challenging for Indonesian coal producers for two Indonesia, it is possible that coal reserves will be reasons: reserve depletion and political posturing in the depleted within 20 years,” Prasodjo said. run-up to the 2014 presidential elections. Jean said the government has the upper hand in “We will start hearing a lot of different voices from regulating coal companies as mining companies have to the political spectrum about how to go forward in terms renegotiate the terms and conditions of their contracts of mining in Indonesia. The nationalistic side of the tone and licenses in line with the 2008 mining law. “The in the mining sector will appeal a lot to the electorate,” rules that concern taxes and royalty will be less Jean said. However, Jean said he expects “pragmatic favorable to the companies,” Jean said, although he and practical” regulations governing the mining sector to added that substantial export restrictions in terms of prevail eventually, adding that it will be difficult to imposing strict quotas for each coal company will implement “very stringent” measures regarding “probably be too complicated to implement.” production controls and caps. S&P, like Platts, is a unit Prasodjo said the drafting of the regulation is in the of the McGraw-Hill Companies. early stages, adding the government is facing difficulties Prasodjo said the plan to control production is in dealing with “many coal players.” He said the mandated by the Indonesian Mineral and Coal Mining discussions include the creation of a formula for coal Law, which was passed by the Indonesian House of quotas, while fiscal measures such as royalty increases Representatives on December 16, 2008. “Although may be implemented for production control. He added Indonesia only has 3% of the world’s coal reserves, it is that the regulation will only be issued after a now the world’s biggest thermal coal exporter,” the coal “democratic consultation” with industry players to director said. ensure a “smooth process.” In 2010, Indonesia’s Geological Agency estimated the country’s coal reserves at 21.13 billion mt and total Small miners hit hardest coal resources at 105.19 billion mt. Prasodjo said the UBS mining analyst Andreas Bokkenheuser said future Indonesian government has set a 2013 coal production plans to control production will affect the operation of target of 391 million mt, up 1% from output last year, of small miners and not large Indonesian coal producers. which 80% is expected to be exported and the rest sold He said production controls may even work against the in the domestic market. government because there will be an increase in unofficial mining, which in turn could result in lower tax Export agreements revenues. He said coal export agreements between Indonesian Jean said: “Our view is Indonesia will be pragmatic coal producers and international buyers will be in its approach. Ultimately, it will be very difficult to “business-to-business” transactions, but the former will implement very stringent measures. In the first place, have to comply with any future regulation to control no production caps are allowed in the so-called coal production. The coal director said the Indonesian contracts of work,” whose holders are major coal government has already abandoned a plan to ban the players producing 70% of Indonesia’s coal output. export of low rank coal because such a measure will not “There will be a little bit of noise concerning the be effective in controlling production and because the growth of the mining sector because of the 2014 technology to upgrade low-rank coal is not yet elections. A majority of the Indonesian electorate sees economically viable on a large-scale basis. the mining sector as draining the country’s resources. Prasodjo said a regulation to control Indonesia’s Of course this is not true. The mining sector brings future coal production will effectively mean the revenues to the government,” he added.

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Cheap coal won’t necessarily boost imports

China, the world’s largest producer and importer of coal, resources are more and more limited, and the may have seen its coal import volumes peak last year at environmental [concerns] are serious.” China’s energy 289 million mt, according to Swiss investment bank demand is projected to grow 4.7% annually to 2015, 2% UBS, with shipments expected to fall in coming years as less than its growth rate from 2006 to 2011, according domestic production grows. However, a second report, to the report, Yang said. published by China’s Energy Research Institute, argues The recommendation to increase the level of that China should take advantage of cheap international imported coal is included in the 715-page China Energy coal prices and import more rather than relying on Outlook, which was published in Chinese late last year domestic production. and aims to project domestic and global energy trends UBS expects China’s imports of coal to decline by through 2015. Yang said this is the first time China has 6.3% year-on-year to 271 million mt in 2013, and further published such a report using its own studies and to 257 million mt in 2014 and 229 million mt in 2015. analyses, instead of relying on projections from the The bank argues that the price difference between International Energy Agency and the US Energy domestic thermal coal and imports is starting to Information Administration. An English translation will be disappear, and that this will have implications for coal- available in a few months. exporting countries such as Australia, Indonesia and The report dovetails with China’s recent release of South Africa. The banks said South Africa and the US its five-year energy plan, in which the country pledged to were not sustainable sources of coal for China, owing to cut its energy intensity by 16% by 2015, including a labor and production cost issues. reduction in the share of coal consumption and an UBS lowered its 2013 and 2014 price forecasts increase in gas use. The China Energy Outlook projects for Chinese thermal coal on expectations of slower that China’s consumption of coal will be as high as 3.8 demand growth in the country and more abundant billion tons annually, representing 63% of the country’s supply when bottlenecks in China’s railway system total energy consumption. ease. The bank cut its forecast price for 5,500 kcal/ Coal demand for seaborne imports is also expected kg NAR domestic thermal coal loaded onto ships at to fall in Europe. A report by consultants Wood Qinhuangdao Port – for delivery to power plants in Mackenzie published in March said that the current China – by 7% for 2013 to Yuan 556 ($88.50)/mt upturn in European coal demand was unlikely to be excluding VAT, and lowered its 2014 price forecast sustained as EU environmental policies weaken the role by 6% to Yuan 581/mt. The bank’s previous forecast of coal in the European energy mix beyond 2020. In was made in June 2012. 2012, coal-fired power supply in Europe rose some 15% China’s demand for domestic coal is expected to 602 TWh, while that for gas-fired power supply fell by to grow from 3.51 million mt in 2012 to 3.73 billion around 20% to 466 TWh, the lowest level of gas-fired mt in 2013, 3.92 billion mt in 2014 and 4.12 generation in Europe since 2002. billion mt in 2015 – a growth rate of 5.0-6.3% over WoodMac coal analyst Jonny Sultoon attributed the each of the three years. At the same time, UBS competitiveness of coal prices to cheap US coal exports analysts forecast a 32.1% compound annual growth pushed out of the North American market by low-priced rate in China’s railway capacity for coal over 2012- shale gas. The report said that European coal demand is 2015 through the expansion of existing lines and likely to remain steady for the next three to four years at the development of new networks. This increased around 200 million tons, but competition between coal transport capacity for coal would allow more product producers could see European coal prices fall as low as to be moved by rail from China’s three major coal- $70/ton. producing provinces – Inner Mongolia, Shanxi and Although coal’s price advantage over gas is likely to Shaanxi – to power stations within China. remain for several years, a mix of environmental policies However, Yang Yufeng, a senior researcher at and initiatives to reduce industrial emissions in Europe China’s Energy Research said that transporting coal from will halt the commodity’s renaissance. Woodmac said: the northwest provinces to demand centres in the south “Our analysis shows that the controls of the Large east ties up rail and highway capacity. “China should Combustion Plant Directive and its successor, the increase imports [of coal] to balance supply and demand Industrial Emissions Directive, will obligate the of the east and west, so as to reduce pressures on retirement of around 15 GW of coal-fired generation transportation and to protect the environment,” Yang capacity by 2015, with a further additional loss of 20 said in a presentation at the Center for Strategic and GW by the early 2020s.” International Studies in Washington. Wood Mackenzie estimates that the scope for new “The coal market is not very tight in Asia-Pacific, so coal-fired capacity in Europe is relatively limited, the price is very good.” He added that coal gasification forecasting that around 10 GW of new capacity will be and liquefaction projects are too expensive at the installed over the next two to three years – around 50% moment, and while China’s coal companies project a of the total build expected in the period to 2030. The 100-year domestic supply, he personally disagrees. analysts said, “coal’s recent role in European power is “They say there is no problem [with domestic supply], much more likely to represent one last push rather than but I, myself, think this is a mistake,” he said. “The the recovery of a long term player.”

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Wildcat strikes break out across South African mining sector

Eight thousand striking workers at six South African employees did not achieve performance targets which coal operations belonging to Exxaro Resources failed would have entitled them to an incentive payment, the to report for work March 20, despite a court interdict group is not prepared to reward these employees with against the illegal action obtained by the company additional payments.” the day before. The miner said in a strike update There are contingency plans in place at the mines that it had approached South Africa’s Labour Court supplying state utility Eskom’s power stations to keep to obtain an urgent interdict directing the striking the plants functioning, the company said, adding that workers to immediately cease the strikes and there are still “adequate levels of coal supply” available resume normal duties. to the generator. The miner approached the Labour Court after A strike also broke out at Shanduka Coal’s Graspan the illegal industrial action started to turn violent Colliery March 19 forcing the mine to suspend March 18, with instances of escalated violence and operations after about 250 employees embarked on damage to property by striking workers at certain violent industrial action, according to the company. The operations. The interdict is a legal requirement opencast Graspan Colliery produces about 3 million mt/ for employers before possibly dismissing striking year of coal, of which 70% is export grade thermal coal workers if they fail to return to work. and the rest is metallurgical. The unofficial strikes over the non-payment of Shanduka – which is 49.99%-owned by Glencore – performance bonuses began March 5 at the Matla and said that employees had given management a list of Arnot thermal coal mines in Mpumalanga, spreading to demands, but that the company would only consider the Grootegeluk underground and opencast mining them if presented through established legal channels. complex and Reductant operations in the Limpopo The miner said that the workers had been removed from province and to the Leeuwpan and Inyanda mines, also the mine property in Middelburg, Mpumalanga by police in Mpumalanga. “We are in ongoing negotiations with and several arrests were made, as the strikers had the workers in a bid to solve this dispute,” Exxaro seized mine equipment and were refusing to leave the spokesman Hilton Atkinson said. premises peacefully. “Talks have failed. I doubt whether the workers will Local South African media reported that seven go back to work unless the bonuses are paid ,” said workers were injured when police fired rubber bullets as Lesba Seshoka, national spokesman for the National they tried to disperse the strikers. Shanduka said that Union of Mineworkers. The NUM March 18 rejected an two Graspan workers had been admitted to hospital with eight-point proposal from the miner. Exxaro said that it gunshot wounds, but were stable, and five other people had proposed a payment of around Rand 2,000 ($216) were also admitted with minor injuries. to all employees, the equivalent of the first quarter 2013 “The industrial action was unlawful, unprotected and incentive of 2% of annual salary, subject to the striking in breach of the employees’ contracts of employment. employees returning to work. It said it had also urged The company remains committed to negotiations on employees to resume work, pointing out that it was in issues of concern within the appropriate legal their best interests, as the “no-work-no-pay” principle framework to resolve the matter amicably,” Shanduka applies to illegal walkouts. said. The National Union of Mineworkers and the Exxaro said the NUM had suggested in discussions Association of Mineworkers and Construction Union told that that the illegal walkouts could be resolved if the South African media that they had not initiated or had miner gave striking employees an across-the-board one- prior knowledge of the strike and were unsure of the off payment. The miner said that “as the striking reason for the action.

US coal exports to decline in 2013: analysts

Analysts at Bank of America Merrill Lynch expect US The front-month API2 (CIF ARA) coal price fell by more thermal coal exports to fall by 10 million metric tons in than 18% in 2012, and the front-month FOB Newcastle 2013 on low seaborne prices and the expectation that price fell to a three-year low of $90/mt last October. The rising US natural gas prices will stimulate domestic analysts said that the worst might not be over. “With demand. The analysts said US thermal coal exports Australia, Colombia and Indonesia ramping up exports, peaked at a record 5.7 million mt in May 2012. the recent recovery in China’s appetite for thermal coal “When thermal coal prices in the seaborne thermal may not suffice to absorb all the oversupply this year. In market fell, partly in response to high US exports, our view, low prices might be necessary for longer to Appalachian coal producers cut back output,” they said. force production cuts and project reviews,” they argued. “When natural gas prices recovered in second-half 2012, As a result, the analysts have reduced their average domestic coal demand picked up and exports declined Newcastle FOB forecast to $92/mt for 2013, including rapidly. Domestic coal demand will likely grow further next an average front-month price of $88/mt in second- year as more coal-to-gas switching unwinds, while seaborne quarter 2013. For 2014, the front-month price is demand for US coal could remain low,” the analysts said. targeted at $96/mt.

42 Energy Economist / Issue 378 / April 2013 Market News Coal / POWER

Colombia coal strike ends

Colombia’s largest thermal coal producer, Cerrejon, has Cerrejon suffered another disruption just days after signed a three-year collective labor agreement with its mine the strike ended and exports resumed when a bomb workers’ union Sintracarbon, the company said March 21, attack on a rail line serving the company derailed 17 bringing to an end 32 days of industrial action that halted wagons, halting shipments. A spokeswoman for Cerrejon the bulk of the country’s coal exports. Cerrejon said mine said repairs would take three days. No one was injured and port operations were to start immediately from the in the attack. While the miner did not blame any specific signing of the agreement, putting an end to the first strike group, Colombian security forces usually attribute such at the company since 1990. The agreement, the Collective action to leftist guerrilla group FARC. Labor Convention 2013-2015, gives Cerrejon workers a Glencore unit Prodeco, Columbia’s third largest coal 5.1% wage rise for the first year and a series of employee miner, is also having problems. The country’s benefits covering health, transport and education. environment authority ANLA suspended in March “Everybody lost in the strike. Now our priority is to production in a section of its Calenturitas thermal coal re-establish operations safely, recover the trust of our mine as a preventive measure for alleged violations to clients and focus on the expansion projects and social its environmental license. ANLA specifically prohibited investment that continue to give to the sustainable mining from the CD section of the Calenturitas mine, development of La Guajira,” Cerrejon president Roberto stating that Prodeco mined coal outside of the permitted Junguito said. The Sintracarbon union said that the territory as stipulated in the license, Prodeco said. The return to operations will be done in “normality” because company has decided to abide with the measure, but is it has monitored the state of the mines and machinery appealing, it said. during the strike period. “The preventive measure imposed by ANLA Almost 80% of Colombian exports were halted, owing implies, unfortunately, various effects in the normal to various supply disruptions in February and March, progress of our operations, including a reduction including a temporary ban on exports from the country’s in coal production in the Calenturitas mine, second-largest exporter, Drummond, and a night time coal the temporary suspension of work done by our transport restriction on the Fenoco railway. Both the export employees on the CD sector, and the corresponding ban and the Fenoco rail restriction were lifted March 1. effect in royalty and tax payments to the nation,” 90-day CIF ARA coal prices jumped about $4 after Prodeco said. The miner did not specify how much the Cerrejon strike began February 6, peaking at coal would be shut in due to the measure. $90.50/mt February 20. However, the price rise was Prodeco mined 14.8 million mt of coal in 2012, limited owing to the availability of South African and a 1% increase year-on-year. The company is also Russian coal imports into Europe. on-track to raise its production to 20 million mt by Cerrejon is a joint venture between miners Anglo 2014, with the construction of a new coal export American, BHP Billiton and Xstrata. It exported 32.8 terminal, Puerto Nuevo, which should be operational million mt of coal in 2012 and is developing a $1.31 by the end of first-half 2013. Prodeco was one of the billion project to expand its thermal coal export capacity few companies not affected by the series of export to 40 million mt/year by 2015. disruptions in February and March.

UAE commissions world’s first 100 MW CSP plant

A consortium led by the UAE’s Masdar launched in pipes and the hot oil is used to create steam to drive a March the world’s largest operating Concentrated Solar turbine. The project includes a dry-cooling system which Power plant, the 100 MW Shams 1 project in the reduces water consumption. It is the first of nine CSP western region of Abu Dhabi emirate. The $600 million projects worldwide with generating capacities of 100 MW development, which took three years to build, will or more that are slated to come into service in 2013. provide electricity to an estimated 20,000 UAE homes “With the addition of Shams 1, Masdar’s renewable while eliminating 175,000 mt/year of carbon dioxide energy portfolio accounts for almost 68% of the Gulf’s emissions from hydrocarbon-fueled power generation, renewable energy capacity and nearly 10% of the world’s the Shams Power joint venture said. installed CSP capacity,” Shams Power said. Like several Masdar, which holds a 60% interest in Shams 1, is the neighboring Persian Gulf oil producers, including Saudi clean energy unit of Abu Dhabi government-owned Arabia, the UAE is seeking to maximize its crude oil Mubadala Development. Its partners in the solar project export capacity, which in turn means limiting domestic are French energy group Total and Spanish energy consumption of oil and gas for power generation. infrastructure company Abengoa, each with a 20% interest. Abu Dhabi currently generates most of its electricity Shams 1 is the Persian Gulf region’s first large-scale from gas-fired power plants. However, with domestic solar power development. It features more than 258,000 demand for gas to inject into aging oil fields rising mirrors mounted on 768 tracking parabolic trough steadily, the emirate is seeking to diversify its energy collectors, covering an area of 2.5 square kilometers (1 mix. Abu Dhabi is targeting the generation of 7% of its square mile). It concentrates the sun’s heat on to oil-filled power needs from renewable energy by 2020.

43 Energy Economist / Issue 378 / April 2013 Market News Power

ACAL heralds fuel cell breakthrough

A small British-based chemicals company says it has made ACAL’s main facility in Runcorn, Cheshire, for testing a significant advance in hydrogen fuel cell performance for before prototype units are made for the field. The automotive and stationary power markets. ACAL Energy’s machine, big enough to service a large house, improves fuel cell design “removes the cost and durability issues” on the performance of other CHP units tested by the that have prevented hydrogen fuel cells from breaking into utility, McCray said. the automotive and stationary generation markets, new “We believe we can get costs down to around $500 Chief Executive Greg McCray said. per kW unit, that’s a key reason why the power company The design replaces 80% of the platinum used in fuel is moving ahead with us,” McCray said. “Removing most cells with a low cost liquid catalyst solution – poly- of the heavy, expensive platinum means we don’t need a oxometallate. Reduced platinum use makes ACAL’s fuel lot of complicated componentry used in a typical fuel cell, cell 25% cheaper compared with best-in-class proton such as the fuel/air hydration system, the air compressor exchange membrane (PEM) fuel cells, and on a par with and water cooling. We don’t need those extra plant units internal combustion engine costs. Switching to a for our system. This makes the unit lighter, smaller and chemical-based catalyst means the fuel cell is able to much less complex for autos and stationary power.” match engines on performance, McCray said, “and can Stacking fuel cells and combining stacks of fuel cells be driven hundreds of miles without re-fueling.” for multiple MWs means the technology could be scaled ACAL’s unit has been tested for 8,000 hours, up for utility use beyond residential level, McCray said, equivalent to 250,000 simulated automotive miles, using hydrogen stored from surplus renewables output. showing zero degradation. “We have not had to change “It is important to note that in our architecture, the unit out any parts or change the chemical solution – it’s a is half fuel cell on the anode side and half redox flow world first and a huge plus for the power industry, which battery on the cathode side,” McCray said. “So the demands durability,” he said. technology can also be used as a cheaper, longer ACAL is ready to commercialize the technology, McCray lasting battery [than a standard lithium-ion battery].” said: “we’ve proven that the science works. Now we are Targeting autos first would get fuel cell costs down negotiating contracts with two global auto companies and significantly “because of the volumes the manufacturers a major power utility to provide them with our technology can generate, helping to solve any engineering issues for 12-month development programs, designing a package along the way,” McCray said. “That will only benefit the to fit their cars or stationary power generation stationary market. What I don’t know is what will show up specifications. We are also working with European utilities, first. It takes a long time for a new car to be developed but are not so far down the contracting route with them.” and I can see this technology appearing at wind farms, The company aims to license its technology to Tier solar farms and in CHP units at the same time or before One and Original Equipment Manufacturers while we see it in mass production for vehicles.” retaining ownership and distribution of its patented ACAL does not consider other fuel cell developers as chemical compound. ACAL, which has 35 employees, is competitors. “Our technology will enable their systems currently involved in a second round of funding led by to work better,” McCray said. “They will need to change Innovator Capital to raise another £15 million. The £15 the cathode side of their PEM fuel cells, which is only million raised to date came from Sumitomo Corp, the 30% of the systems, to include our approach and our Carbon Trust, I2BF, Solvay, the Technology Strategy chemicals to get the same durability we have.” Board and an unnamed Japanese automaker. Growing cooperation would drive the technology to “The improvement in cost and durability allows us to viability, McCray concluded. The auto industry is forming target both auto and stationary markets with the one consortia, sharing fuel cell technology and establishing technology, opening up new economies of scale,” supply chains to get costs down. “BMW is collaborating McCray said. The utility development agreement involves with Toyota, Daimler is collaborating with Ford and a residential combined heat and power unit, designed at Nissan – it is beginning to happen,” he said. Power train comparisons

Internal Battery Fuel cell Fuel cell combustion (standard PEM) (ACAL’s FlowCath) engine Cost/kW $25-50 $200-400 < $50 < $40 Lifetime miles 200k+ Up to 100k 100-150k, 250k, depends on 15% degradation no degradation charge cycles Refuel time 5 mins 8 hours < 5 mins < 5 mins Range miles 500+ 120 max 500+ 500+ Fuel cots per petrol £6.50 14 kWh of charge £3.50 using grid £3.50 using grid gallon equivalent = £2.10 @ 15p/kWh electrolysers electrolysers Service intervals 12 months 12 months 12 months 12 months Source: ACAL Energy

44 Energy Economist / Issue 378 / April 2013 Market News Power

Power-to-gas demo plant to be built in Germany

Thirteen companies in the Thuega Group, a produce synthetic methane. This could be fed into the conglomerate of 100 German municipal energy utilities, gas grid in unlimited quantities. have combined forces to build a power-to-gas energy Germany will need 17 TWh of storage capacity storage demonstration plant in Frankfurt, Germany. The by 2020, Thuega said. “The municipal natural gas plant is to use proton exchange membrane (PEM) distribution network will be the battery of the future, electrolysis technology. Construction will begin in mid- we are building the battery charger,” said board 2013 with commissioning scheduled for the end of the member Michael Riechel. Operational data from the year. The unit is to be supplied by UK company ITM project is to be shared by the whole Thuega Group. Power. An investment sum was not revealed. For ITM Power the project represents a first ITM Power’s PEM electrolyser has input capacity of commercial sale in Germany of its self-pressurizing 320 kW and can generate 60 cubic meters of hydrogen rapid response PEM Electrolyser. The unit produces per hour – 1 cu m of hydrogen is equivalent to 3.54 kWh, 125 kg/day of hydrogen gas and incorporates AEG Thuega said. The hydrogen will then be fed into the natural power electronics. ITM said its PEM electrolyser gas network, limited to a maximum concentration of 5%. can respond in one second to fluctuating renewable

A second phase may follow in which CO2 from an inputs, storing surplus power as hydrogen. The adjacent heat-only plant – Mainova’s Schielestrasse technology is self-pressurizing up to 80 bar, allowing plant in Frankfurt – is reacted with the hydrogen to direct injection into the German gas grid.

Trends in Middle Eastern power generation

The amount of power generation capacity under While the rate of increase in electricity demand may development in the Middle East saw a marked uptick thus be unsustainable in some respects, the region is in activity in 2012 at almost all stages of the project still expected to register substantial growth in demand. development pipeline. The figures are dominated by Population growth and urbanization rates in much of the trends in Saudi Arabia, which accounts for a large region are high, while in several countries oil and gas part of the region’s installed capacity and demand revenues are being used to build energy-intensive growth prospects. Official Saudi Arabian projections infrastructure and industrial facilities for long-term indicate that by 2032 about 120,000 MW of development and diversification of their economies. installed capacity will be needed, compared with the Noted aspects of the region are the very limited 51,148 MW installed at end-2011. amount of coal-fired or hydroelectric plant and the Most other countries in the region are also preponderance of gas and oil-fired capacity. In addition, projecting a marked increase in capacity as a result of many power projects are integrated with desalination burgeoning demand, albeit with highly subsidized sales facilities. Gas-fired capacity dominates the list, although to the residential sector forecast to be a significant oil-fueled plant forms a substantial component of capacity driver of the high rate of demand growth in many in Saudi Arabia in particular. And while the development jurisdictions. For instance, in Kuwait it has been of some oil-fueled plants in the region is predicated on reported that electricity sales revenues cover little more their conversion to gas use once the fuel is available, in than 5% of the overall cost of supply, with the average Saudi Arabia in particular oil-fired plants are premised on retail tariff being equivalent to $7/MWh against the the continued use of oil rather than gas, with the latter $134/MWh cost of supply. fuel being reserved for higher value applications.

Trends in Middle Eastern power generation, 2012 (MW)

Announced Approved Contracted Construction Total Bahrain 0 0 0 0 0 Iran 0 0 0 0 0 Iraq 0 0 2228 0 2228 Jordan 0 0 0 0 0 Kuwait 0 0 400 0 400 Oman 0 0 0 2000 2000 Qatar 0 0 0 0 0 Saudi Arabia 4000 0 7962 1200 13162 UAE 4500 0 1639 100 6239 Yemen 0 0 400 0 400 Total 8500 0 12629 3300 24429

Note: The tracker does not list all the projects under development in the region – only those which passed a significant development milestone during the period in question.

Source: Platts Power in Asia

45 Energy Economist / Issue 378 / April 2013 Data CO2 Market

CO2 Market

EU carbon prices rise on signs of intervention support

The price of EU carbon dioxide allowances for December and resume “only once there is clarity of the volume to 2013 delivery sank to an intra-month low of €3.52/mt be auctioned,” the Commission said March 25. The ($4.52/mt) March 19, but had rallied sharply to €4.49/ Commission sent a letter requesting the delay to the mt by March 23. The revival reflected signs that support European Energy Exchange, and said the UK government is growing for measures proposed by the European had sent a letter to its national auction platform, ICE Commission to curb supply – at least temporarily. Futures Europe, requesting the same thing. Germany Representatives from EU national governments are began auctioning aviation allowances in November 2012 making progress on reaching an agreement to support and has sold 2.5 million permits. the Commission’s proposal to “backload” 900 million Last November, the Commission allowed non-EU EU Allowances, the Irish presidency of the EU said airlines a one-year break from complying with the EU ETS March 22. “The Council [representing national for aviation to give time for the International Civil governments] is making some progress at a working Aviation Organization to find agreement on a global level on agreeing a position,” a spokeswoman for the system to control aviation’s CO2 emissions. That means current Irish presidency of the EU said. that this April, airlines are not required to hand in ETS She added that Ireland itself supported the allowances on flights that either began or ended outside backloading proposal. “Ireland has made securing the EU in 2012. agreement on this file a priority so it is safe to say then The proposal is still making its way through the EU’s that we are nationally supportive,” she commented. legislative process and because the one-year delay is Other governments that are known to back the plan optional, it is not certain that all airlines will take include the UK, France, the Netherlands, Finland and advantage of the one-year break, according to a Slovakia, while the outgoing Italian government gave its regulatory update from the Commission. “Since the ETS conditional backing. Several other states including directive provides for 15% of aviation allowances to be Poland, the Czech Republic, Greece, Malta and Portugal auctioned, this deferral will significantly reduce the are thought to be opposed. Germany’s environment volume of aviation allowances to be auctioned,” the minister Peter Altmaier said in March that the German Commission said. “Due to these extraordinary government will not take a formal position until after the circumstances, the Commission and member states European Parliament votes on a mandate to negotiate have concluded that the auctions cannot be conducted with national governments in April. earlier than June 2013,” it said. The parliament’s environment committee backed the proposal to withhold 900 million EUAs from auctions in CO2 price trend (€/mt) 2013-15 and return them to the market in 2019 and 2020, but Parliament’s industry committee voted against, 12 highlighting divisions amongst MEPs. The environment 2013 committee chairman, Matthias Groote, who is leading the 10 2014 parliament’s negotiations on the proposal, is seeking a mandate from a full sitting of the parliament April 16. 8 That vote is likely to be very close, a parliament source told Platts. If Groote does not get a mandate, 6 he will not be able to get an early “first reading” agreement with national governments, so the 4 process would be delayed. The backloading proposal is seen as a relatively 2 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 benign measure to bolster the carbon price, by temporarily curbing the volume of allowances entering Source: Platts European Power Daily the market from auctions, without altering the overall carbon cap to 2020. The measure is seen as a stop-gap Platts CO2 assessment monthly averages, to support the flagging carbon price while more difficult February 2013 (Eur/mt) negotiations are launched on long-term structural reforms to the EU Emissions Trading System. However, Delivery High – Low Midpoint even this relatively modest intervention proposal has Dec-13 4.7278 – 4.6878 4.7078 met with stiff opposition from some EU member states, Dec-14 4.9589 – 4.9189 4.9389 Dec-15 5.1761 – 5.1361 5.1561 who do not want higher carbon prices at a time when economies are struggling to emerge from a severe All prices are in euros per metric tonne of carbon dioxide equivalent economic slowdown. as traded under the EU Emissions Trading Scheme. Elsewhere, auctions of aviation allowances under the Source: Platts European Power Daily EU ETS are expected to be delayed until at least June

46 Energy Economist / Issue 378 / April 2013 Data Market Indicators

Market Indicators

Brent drops $6/b in March

International crude benchmark Dated Brent trended down reopen until March 28 for fear of a bank run. Given the in March, dropping from just over $112 per barrel at end- terms of the bailout this seems almost certain. February to $106.20/b March 25, having hit a 10-month ICE Brent’s premium to NYMEX crude fell to an high of $119.025 as recently as February 8. The first day 8-month low March 22 as the crisis in Cyprus exerted of March saw a sharp sell-off as weak manufacturing particular pressure on Brent, while NYMEX crude data in China and Europe punctured earlier expectations remained buoyant on a weaker dollar. The differential of stronger economic growth. Larger North Sea loading between the two front-month crude contracts fell below programs for April – up 8% on March – also helped push $14.40/b for the first time since mid-July 2012. Brent down and narrow the backwardation between the OPEC pumped an average 30.42 million b/d of crude in two front month ICE Brent futures contracts. February, 30,000 b/d lower than January’s 30.45 million The death of Venezuelan President Hugo Chavez b/d, according to a Platts survey. Decreases totaling failed to provoke any sustained supply-side concerns 140,000 b/d were partly offset by increases of 110,000 with the market focusing instead March 6 on US Energy b/d. Saudi Arabia shaved output by 50,000 b/d to 9.2 Information Administration data that showed US crude million b/d, while Nigeria, where oil production and exports stocks had climbed to near nine-month highs. remain vulnerable to sabotage, saw a 60,000 b/d fall. Later in the month, Eurozone member Cyprus was Other smaller declines came from Algeria, Libya and Qatar. forced to seek an emergency bailout from the Eurogroup, Iraq boosted output by 100,000 b/d to 3.1 million IMF and European Central Bank. While bailout terms b/d, while Angolan volumes rose by 10,000 b/d to have been agreed, and the risk of contagion from a average 1.8 million b/d. Iran held volumes steady collapse of the banking sector in Cyprus contained for around 2.7 million b/d in February, although exports the moment, as Energy Economist goes to press, remain vulnerable to pressure from tightening sanctions Cyprus’ banks remain closed. They were not expected to on Tehran over its nuclear program.

Oil forecasts (million b/d) International rig count (monthly average)

Change in Change Total Change 4000 Call on non-OPEC in OPEC World Oil in OPEC supply NGLs Demand demand 3500 Oil Gas March 2013 estimates for 2012 3000 EIA 30.89 0.57 0.18 89.12 0.81 2500 IEA 30.30 0.60 0.40 89.80 0.90 2000 OPEC 30.10 0.50 0.30 88.80 0.80 1500 March 2013 forecasts for 2013 1000 EIA 30.29 1.17 0.24 90.13 1.01 500 IEA 29.70 1.10 0.20 90.60 0.80 0 OPEC 29.70 1.00 0.30 89.70 0.90 Feb-99 Feb-01 Feb-03 Feb-05 Feb-07 Feb-09 Feb-11 Feb-13 Sources: EIA, IAE, OPEC Source: Baker Hughes

Dated Brent ($/b) NYMEX 3-2-1 Crackspread* ($/b)

130 50

120 40 110

100 30 90

80 20 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13

1-year average: 110.45 2-year average: 112.44 1-year average: 30.81 * A hypothectical re ning margin used for trading purposes based on three 5-year average: 93.01 10-year average: 73.70 2-year average: 28.73 barrels of crude making two barrels 3-year average: 23.29 of gasoline and one barrel of distillate.

Source: Platts Global Alert Source: Platts Global Alert

47 Energy Economist / Issue 378 / April 2013 Data Market Indicators

Platts forward curve for Dated Brent ($/b) Market structure: Dtd Brent vs 1st Mo ($/b)

March 26, 2012 110 2

1 105

0 100 -1

95 -2

90 -3 Apr-13 Jun-13 Aug-13 Q2-13 Q4-13 Q2-14 Cal-14 Cal-16 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 Source: Platts Forward Curve – Oil Source: Platts Global Alert Natural Gas month-ahead ($/MMBtu) Coal ($/mt)

12 140

10 120

8 100

6 Zeebrugge UK NBP Henry Hub 80

4 60

2 40 ARA 90-day NYMEX lookalike Qinhuangdao 1st month 90-day 0 20 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13

Source: Platts Gas Daily, European Gas Daily Based on energy values of CIF ARA 6,000 Kcal/kg, FOB Qinhuangdao 6,200 Kcal/kg, Nymex lookalike 6,668 Kcal/kg Source: Platts Coal Trader, Coal Trader International

Oil product comparisons: March 22, 2013 ($/b)

WTI Cushing Front month: 93.39 Brent front month: 108.3 Dubai front month: 104.10

CIF NY FOB Rotterdam Barges Unleaded 93 0.3% Barge 131.84 Premium Gasoline 10 ppm 120.96 No.2 Barge 120.83 Gasoil 0.1% 120.21 Jet Barge 122.58 Jet 120.79 No.6 3.0% NY Spot cargo 94.48 Fuel Oil 3.5% 93.82

US

EUROPE

ASIA

FOB Singapore Gasoline 92 unleaded 118.01 Gasoil Reg 0.5% sulfur 120.75 Kerosene 119.84 HSFO 180 CST 96.62

FOB Gulf Coast Unleaded 93 (waterborne) 133.84 No.2 (waterborne) 118.55 Jet 54 (waterborne) 121.25 No.6 3.5% 94.69

Source: Platts Global Alert

48 Energy Economist / Issue 378 / April 2013 Data Market Indicators

NWE next month generating cost NWE next quarter generating cost comparisons, profit/loss ($/MWh) comparisons, profit/loss ($/MWh)

25 20 20 Coal Gas

15 10 10 5 0 0 -5 -10 -10

-15 Coal Gas -20 -20 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 Source: Platts European Power Daily Source: Platts European Power Daily

Cincinnati next month generating cost Atlanta next month generating cost comparisons, profit/loss ($/MWh) comparisons, profit/loss ($/MWh)

80 30 70 Coal Coal 25 Gas 60 Gas 20 50 40 15 30 10 20 5 10 0 0 -10 -5 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 Source: Platts Source: Platts NWE Note: Based on typical kg CO2/mmBtu rates of 101.5 for coal, 55 for natural gas; and on generating efficiencies of 49% for UK gas plant, 54% for western Europe gas plant, 34% for all coal plant. Benchmark coal priced at ARA. Details of methodology at www.platts.com. US Note: Based on typical heat rates of 9,800 Btu/kWh for coal generation and 7,800 Btu/kWh for natural gas generation; no NOx controls on coal stations resulting in 0.6 lb/mmBtu NOx; benchmark coals meeting specifications for NYMEX look-alike and CSX-Big Sandy/Kanawha Central Appalachian coals, barged to Cincinnati and railed to Atlanta, respectively. For details, see methodology at platts.com.

Comparative power feedstocks: March 22, 2013 ($/MMBtu)

NY Harbor 1% S fuel oil 15.52 NW Europe fuel oil 15.27 Singapore fuel oil 16.73 Henry Hub gas 4.02 NBP gas 10.74 Japan JCC LNG 16.38 NYMEX coal 2.60 ARA coal 3.44 Qinhuangdao coal 4.07

EUROPE U N I T E D S TAT ES ASIA

Japan JCC value shows latest available CIF price published by the Ministry of Finance, converted to US dollars per MMBtu. All other values re ect Platts most recent one-month forward assessments for each product in each region, converted to US dollars per MMBtu.

Source: Platts LNG Daily

49 Energy Economist / Issue 378 / April 2013 Data Market Indicators

Asian spot LNG weakens Comparative power feedstock prices: US The price of spot LNG cargoes in Asia Pacific continued ($/MMBtu) to weaken in March, with the Japan-Korea Marker 20 dropping to $15.625/MMBtu March 26 from $17.875/ MMBtu at the beginning of the month. The slippage 16 reflects warm weather in Japan, where temperatures rose to a high of 20° C towards end-March, limiting 12 Gulf Coast 3% S fuel oil incremental demand for April LNG cargoes. A report Henry Hub natural gas NYMEX coal published by Goldman Sachs said Asian spot LNG prices 8 were likely to continue to soften, but remain above $14.00/MMBtu through to end-2013, as the expected 4 slowdown in demand in spring/summer, increased global 0 supply and the delivery of new vessels later this year Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 weighs on prices. Values re ect Platts most recent one-month forward assessments US gas prices trended higher in March, with for each product in each region, converted to $/MMBtu. front-month Henry Hub futures rising from 3.456/ Source: Platts LNG Daily MMBtu March 1 to $3.927/MMBtu March 22 before falling back slightly after the US Energy Information Comparative power feedstock prices: Asia Administration reported a smaller-than-expected ($/MMBtu) draw from storage. The contract briefly touched 24 $4.025/MMBtu in intra-day trade. Spot gas prices 20 also moved up with several brushing past the $4/ MMBtu mark and others hitting highs not seen in 18 16 months. Continued cold weather demand combined with pipeline maintenance and constraints were the 12 Singapore fuel oil Japan JCC LNG main reasons for the rise. 8 Qinhuangdao coal Open interest for the NYMEX natural gas futures contract reached a record high 1.34 million contracts 4 March 19, breaking another recent record set March 15 0 of 1.3 million contracts. The numbers in March top the Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 previous record of 1.3 million set in April 2012. Since Japan JCC value shows latest available CIF price published by the the gas market started to rally five weeks ago net long Ministry of Finance, converted to $/MMBtu. All other values re ect Platts most recent one-month forward assessments for each product positions have also been at all-time highs. in each region, converted to $/MMBtu. In Europe, prompt prices on the UK’s NBP gas hub Source: Platts LNG Daily remained strong as colder than average temperatures and high demand left the UK relying on increased Comparative power feedstock prices: NWE imports from the continent and depleting storage stocks. ($/MMBtu) The UK’s Dragon LNG began flowing gas March 22 as a 20 brief halt to flows through the Interconnector pipeline sent within-day prices to 150 p/th. The day-ahead and 15 within-day contracts were seen around the 96.00 p/th mark March 20. UK demand reached 378 MMcm March 12, 95 10 MMcm above the seasonal norm. Demand fell under the 300 MMcm mark March 15, but snapped back up to 5 310 MMcm March 18 and continued to hover above that level. Temperatures across most major UK cities were NWE fuel oil NBP gas ARA coal 0 expected to plunge below the seasonal norm March 24 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 by a minimum of 5 degrees Celsius and a maximum of Values re ect Platts most recent one-month forward assessments 11 degrees Celsius. for each product in each region, converted to $/MMBtu. The price differential for the UK NBP day-ahead Source: Platts LNG Daily contract versus Belgium’s Zeebrugge hit 10.80 pence/therm March 20, the widest since February Coal market oversupplied 2005. However, continental gas prices also received The European-delivered CIF ARA physical thermal coal a boost from cold snaps. Dutch TTF day-ahead gas market dropped $9.40/mt from the beginning of March prices surged to more than a one-year high March to reach $80.75/mt March 22, trading at near three-year 11, breaching the €30/MWh price level, and then lows of under $80/mt March 21. The fall reflected an rose further as the onset of colder-than-expected end to a series of Colombian export constraints – which temperatures coupled with the lack of LNG supplies might have shut in as much as 4 million mt of coal – and low storage levels raised supply concerns. Next amid limited buying interest, leading to expectations that day gas reached €34.85/MWh March 22. the market would revert to oversupply.

50 Energy Economist / Issue 378 / April 2013 Data Market Indicators

UK baseload month ahead (£/MWh) US day ahead ($/MWh)

55 150

PJM West 120 Into Cinergy 50 90

60 45

30

40 0 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 Source: Platts European Power Alert Source: Platts

European baseload month ahead (€/MWh) US day ahead ($/MWh)

60 100 Dutch German Spanish Palo Verde Mid-C 55 80

50 60

45 40

40 20

35 0 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 Source: Platts European Power Alert Source: Platts

Nord Pool system day ahead (€/MWh) US day ahead ($/MWh)

70 250

60 200 ERCOT (Houston) 50

40 150

30 100 20 50 10

0 0 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13

Source: Platts European Power Alert Source: Platts

The South African Richards Bay FOB physical market CFR South China prices for 5,500 kcal/kg NAR fell $4.30/mt from early March to reach $80.65/mt coal lost $2.50/mt during the month, falling to March 22. Sources questioned the amount of demand $82.75/mt, pressured by low Chinese domestic for higher calorific value 6,000 kcal/kg NAR South prices. FOB Qinhuangdao 5,500 kcal/kg NAR prices African coal from Chinese and Indian buyers, although slipped $3.08/mt to $81.64/mt, or Yuan 512/ supply tightness for Indonesian cargoes was said to be mt, March 22. Chinese end users were also heard helping Indian demand for lower CV Richards Bay to be drawing on their stockpiles. Newcastle 5,500 material. Richards Bay Coal Terminal stocks were kcal/kg NAR prices also fell $2.70/mt during the reported to be high at around 4 million mt, with an month to $73.80/mt March 22, after rainfall let up, abundance of higher CV cargoes available. However, improving supply conditions. A short-lived cyclone sources said that the available supply of 5,500 kcal/kg in the Coral Sea, and railway maintenance to NAR Richards Bay coal was tight, with Chinese buyers Newcastle port’s coal chain, had minimal impact on having previously bought a number of cargoes. Australian spot prices.

51 Energy Economist / Issue 378 / April 2013 UDI WORLD ELECTRIC POWER PLANTS DATABASE

NEW 2012 EDITION UDI World Electric Power Plants Database (WEPP) is a global FOR MORE INFORMATION inventory of electric power generating units. It contains design data for plants of all sizes and technologies operated by regulated OR TO ORDER, VISIT utilities, private power companies, and industrial autoproducers WWW.UDIDATA.COM (captive power). OR CALL YOUR NEAREST PLATTS OFFICE: UNIQUE DATABASE IS THE LARGEST INFORMATION RESOURCE AVAILABLE North America • Design information for more than 167,000 units at nearly 1-800-PLATTS8 (toll-free) 75,000 plant sites in 230+ countries — every country is represented Europe/Middle East/Africa +44-20-7176-6111 • Coverage of installed and projected steam and gas turbines, combined-cycle plants, IC engines, hydro units, wind turbines, Latin America and renewable energy units +54-11-4804-1890 • Details on plant operators, geographic location, capacity (MW), age, technology, fuels, and boiler, turbine, and generator Asia-Pacifi c manufacturers, emissions control equipment, and more +65-6530-6430

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