Oil-related Developments - May 2018

1) President Trump on OPEC: Donald Trump launched an attack on OPEC on 20 April for pushing oil markets to the highest level since 2014, saying that crude prices have been driven up “artificially” by the cartel. The US president’s statement, made in one of his customary early morning tweets, followed comments by Saudi Arabia’s energy minister that the world economy could cope with higher oil prices, as crude approached $75 a barrel.

Mr Trump’s comments will be seen as a warning in Saudi Arabia not to allow oil prices to run too high, at a time when Riyadh is pushing the US to back them in confronting Iran. Brent crude oil fell by roughly a dollar following Mr Trump’s tweet, having hit a near four-year high of $74.75 a barrel on Thursday.

Amy Myers Jaffe, a senior fellow at the Council on Foreign Relations, said: “This tweet is a direct signal to Saudi Arabia that they are making the president’s job harder, not easier. The president is tweeting now because sharply rising oil prices make US strategic decision-making and diplomacy more difficult, as well has having a direct impact on his political base if gasoline prices go up in the summer.”
Reports quoting people briefed by Saudi officials say the kingdom was targeting prices at $80 or even $100 a barrel. Riyadh needs to raise the value of state-oil company Saudi Aramco, a portion of which it plans to list to fund plans to modernise the economy.

Despite President Trump’s declaration that oil markets were well-supplied, analysts believe the market is tightening rapidly. The International Energy Agency said last week that OPEC was close to being able to declare “mission accomplished” in its aim of reducing oil inventories that had grown during the 2014 crash. That crash drove prices briefly below $30 a barrel from above $100 at the start of the decade.

2) Investment issues before OPEC: While the surplus crude and oil products may have reduced to OPEC’s target levels, the group now says it would rather see a pickup in investment, which fell by $1 trillion in the three years of surplus and weak prices that started in June 2014.

Saudi Aramco Chief Executive Amin Nasser said in March that the global oil and gas industry needs to invest more than $20 trillion over the next 25 years to meet growth in demand and compensate for the natural decline in developed fields. Qatar’s Energy Minister Mohammed al-Sada has said that the global oil investment of around $400 billion would not be enough.

Investment data from the International Energy Agency confirms OPEC is correct about the drop in spending, but it also shows the situation is not quite as dire as OPEC believes. On aggregate, compared with the peak in investment of close to $800 billion in 2014, the data shows that spending did drop by some $1 trillion to 2017. The IEA data suggests the decline amounted to around $340 billion between 2014 and 2017, but this slowed to $120 billion between 2015 and 2018, suggesting recovery is underway. In fact, the IEA estimates that investment this year will rise for the first time since 2014 to $466 billion, 20 percent lower than in 2011, when the average oil price was above $100 a barrel.

However, what the numbers don’t reflect is the huge gain in efficiency since 2014, when oil majors started to force service providers to slash costs. The majors began generating much bigger free cash flows at oil prices of $50 per barrel compared to what they generated when prices were double that level.

3) ARAMCO to invest in Indian refinery: Saudi Aramco, the world's largest oil producer, will hold an equal stake in the planned $44-billion refinery-cum-petrochemical project in Maharashtra.
Indian Oil, Hindustan Petroleum and Bharat Petroleum plan to jointly set up one of the largest petrochemical projects in the world on the west coast of India to cater to the country's growing fuels and petrochemical requirements.

India has a refining capacity of 232.1 million tonnes, which exceeded the demand of 194.2 million tonnes in the financial year 2016-17. According to the International Energy Agency, this demand is expected to reach 458 million tonnes by 2040.

Aramco, on its part, is seeking to lock in customers in India, the world's third-largest oil consumer, through the proposed investment. Saudi Arabia was the biggest oil supplier to India till 2016-17 but slipped behind Iraq last year. It had supplied 39.5 million tonnes of crude oil to India in 2016-17, ahead of 37.5 million tonnes by Iraq. The proposed refinery will give the Saudi national oil company an assured customer for additional 30 million tonnes of its crude oil. It will supply half of the crude oil required for processing at the refinery.

Currently, IOC holds 50 percent stake in RRPL, while HPCL and BPCL have 25 percent stake each. After Aramco's entry, the 50 percent stake will be split in same proportion between IOC, HPCL and BPCL. The refinery-cum-petrochemical complex will be completed in the next five to seven years.


May 1, 2018

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About the Author

Ambassador Talmiz Ahmed

Former Ambassador of India to Saudia Arabia, Oman and UAE, monitors developments in the West Asian region.  

Ambassador Talmiz Ahmad joined the Indian Foreign Service in 1974. Early in his career, he was posted in a number of West Asian countries such as Kuwait, Iraq and Yemen and later, between 1987 and 1990, he was Consul General in Jeddah. He also held positions in the Indian missions in New York, London and Pretoria. He served as Indian Ambassador to Saudi Arabia (2000-03; 2010-11); Oman (2003-04), and the UAE (2007-10). He was also Additional Secretary for International Cooperation in the Ministry of Petroleum and Natural Gas in 2004-06. In July 2011, the Saudi Government conferred on him the King Abdul Aziz Medal First Class for his contribution to the promotion of Indo – Saudi relations. After retirement from the Foreign Service in 2011, he worked in the corporate sector in Dubai for three years. He is now a full-time academic and holds the Ram Sathe Chair for International Studies, Symbiosis International University. He has published three books: Reform in the Arab World: External Influences and Regional Debates (2005), Children of Abraham at War: the Clash of Messianic Militarisms (2010), and The Islamist Challenge in West Asia: Doctrinal and Political Competitions after the Arab Spring (2013). He writes and lectures frequently on Political Islam, the politics and economics of West Asia and the Indian Ocean and energy security issues.