2019 in review. Most important events in energy sector

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2019-12-27

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BiznesAlert.com presents a summary of the most important events in energy sector in 2019. Such reports are to be published regularly on monthly basis.

OIL

Aramco IPO-much expected, yet a limited success

Aramco, the Saudi state company (which is also the world’s largest oil company and world’s biggest CO2 producer) started to be listed on December 11, 2019 on the Saudi Stock Exchange Tadawul, as part of initial public offering (IPO). Goldman Sachs was appointed Stabilizing Manager for IPO, and it has been granted the option to purchase an additional number of shares equal to up to 15 % of the total number of shares sold in offering. The stabilization period ends on January 9, 2020, and Aramco has recently announced that Goldman Sachs may stabilize its shares[1].

Aramco become the world’s largest listed company, surpassing the combined worth of five of the largest Western energy companies: BP, Chevron, Exxon Mobil, Royal Dutch Shell and Total. More – and this is a rare case of an old-line company[2] topping technology majors – Aramco is currently worth more than Apple, Microsoft, Alphabet, and other global world companies.

The company’s long awaited IPO -which had been initially planned for the second half of 2018 but postponed due to, reportedly, resistance from the ruling family, the company, and lower prices – is the pillar of Crown Prince Mohammed bin Salman’s Vision 2030 program aimed at diversifying the Saudi economy and its dependence on oil, which account for as much as 70% of government revenues. The proceeds of the IPO will go to the Public Investment Fund, a stabilisation and development fund, which is also aimed to be the driving force behind the development and infrastructure projects under Vision 2030.

One of the first obstacles in the path of the listing was the initial high valuation of the company (estimated at $ 2 trillion), which the Saudi officials were forced to bring down at nearly $1.7-1.8 trillion after a lukewarm response of investors, but also the lower shares offered for listing than it had been planned. Initially, it had been planned a 5% listing, which at $ 2 trillion valuation, would have raised $ 100 billion. In the end, only 1,5% share were offered for free floating. The other major obstacle was Aramco’s listing on Tadawul, and not on a foreign exchange, such as London or New York, chiefly due to Saudi authorities’ reluctance to disclose operational information about the company, but also to various regulatory obstacles.

Yet, probably boosted also by OPEC and OPEC+ deal of December 5, its current valuation has surged since December 11, jumping at $ 2 trillion: it began trading at 32 riyals ($8.53), it rose at 36.70 riyals ($9.78), and it decreased at 35.35 riyals ($ 9, 41) as of this writing.

However, there is an important deficit of global investment in Aramco-most of the investment has hitherto come from Saudi investors-private and institutional-, and regional ones. Furthermore, aside the markets’ and geopolitical headwinds that Aramco may face, some consider that company’s IPO arrives ten years too late, given the structural factors that are reshaping the oil markets, notably the US crude oil production boom, and the world’s need to move away from fossil fuel in order to fight the climate change. Latter is a chief driving factor of major energy companies’ investment into renewables. Last but not least, given also other factors, such as the regional rivalry between Saudi Arabia and Iran, and Riyadh’s role in Yemen’s conflict, geopolitical concerns may continue to weigh more on Aramco’s IPO.

Polish Briefing: PKN Orlen on deliveries from Saudi Arabia and the merger with Lotos

OPEC and non-OPEC output cut of December –a market stabilizing factor, but a temporary one

Following a tumultuous meeting in Vienna, on December 6, 2019, OPEC, Russia and other oil producers agreed to cut oil production by additional 503,000 barrel/day, which will bring the total cuts to 1.7 million barrels/ day, or 1, 7% of global oil demand. This additional adjustment will be effective from January 1, 2020.

At the end of 2016, OPEC and non-OPEC producers agreed, for the first time, a coordinated cut in oil supply of 1. 8 million barrels/ day, which entered into force on January 1, 2017. This move was triggered by various countries’ common willingness to ease the global glut after more than two years of low prices, and to improve the financial conditions of their economies.

Yet, several key-issues arise, of which most important are: i) extension of the cut in the second quarter of 2020 (OPEC and its allies plan to meet in Vienna on March 5-6 to review the production cut agreement due to expire end of month); ii) difficulty to reach full compliance -for instance, in 2019 countries as Iraq and Nigeria struggled to meet the production targets [3] ; iii) and the reaction of oil markets, which seem to be more impacted nowadays by other factors (i.e. : the surge of US oil production, expected to grow to 11.6 million barrels per day by 2022; the issue of trade war between the US and China; the global economic slowdown, and so forth).

Another critical issue is the supply of non-OPEC countries in 2020; a slowdown would clearly help OPEC’s efforts to balance the market, and chiefly the oil price. Yet, it seems that balancing the markets and oil price would not be straightforward, as OPEC forecasts the non-OPEC supply in 2020 to 64.46 million barrels/day, up 2.17 million barrels/day from 2019, driven by the US, Canada, Norway and Brazil. Also, OPEC expects the world oil demand to rise by 1.08 million barrels/day in 2020, and to reach 100.88 million barrels/day.

However, without the cut, it would have been difficult for the OPEC and OPEC+ countries to preserve a balanced oil market, able to address their economic interests-especially to maintain the oil price around $60 per barrel at least; and also to preserve backwardation-a sign that markets may get tighter.

But both OPEC and Russia should prepare to address the following fundamental developments of oil markets, which would be more difficult to be addressed through simple output cuts: the fossil fuel abundance triggered by the shale revolution, coupled with “the rapid fall in the cost and growth in the deployment of renewable power generation”, with “large uncertainties”[4], and any eventual global economic slowdown . In sum, they should be ready to face “the new oil order”[5].

New depression of oil prices on the horizon

The Druzhba oil contamination crisis to reverberate also in 2020

Oil contamination crisis of spring 2019 damaged the Russian oil sector’s reputation Talks on compensation are likely to last until half of 2020 because the damage to infrastructure in countries like Poland are yet to be counted.

On April 19; 2019, oil deliveries from Russia to Europe were contaminated: hence, the oil coming through Druzhba pipeline significantly exceeded the quality norms. The quality norms are measured with PPM (parts-per-million) of organochlorine. The Post-Soviet GOST norm is 10 ppm, and according to some media outlets, the oil deliveries reached even 100 ppm in April[6]. Official information about the contaminated oil was given to the public from Belarusian oil pipeline operator Belneftekhim on April 19, 2019, and it was confirmed by the Russian operator Transneft. Belarusian company informed about exceeding the quality norms and the damages to its oil infrastructure caused by the contaminated oil.

On April 24, the Polish oil pipeline operator PERN decided to shut down the supplies from Belarus, and by doing so it basically blocked the oil deliveries through Druzhba to Germany. Similar decision was made by Ukrainian oil pipeline operator Ukrtransnafta, resulted in the cut off of supplies to refineries in Germany, Slovakia, Czech Republic and Hungary. Reports from Belarus’ company Gomeltransneft- Druzhba suggested that the contamination affected 5 million tonnes of oil, of which 1.8 million tonnes on the territory of Russia, 1.7 million in Belarus, 1 million in Poland and 500,000 in Ukraine.

According to Centre for Eastern Studies, given the scale of the contamination, it cannot be ruled out a purely technical cause, as contaminating around 5 million tonnes of oil requires conscious actions (or omissions) by the producers or entities responsible for overseeing the operation of the transmission infrastructure[7]. A legitimate question arises, namely if Russian entities and/or authorities had known about this problem before, because the internal deliveries during the period from April 4-17 were already contaminated. That leads to the hypothesis that the contamination might have been perpetrated on purpose. However, such theory might be countered by the argument that contaminated oil crisis did greatly hurt the Russian oil sector’s reputation. The other explanation would be the underinvestment and management inefficiency in the sector .

Deliveries through Druzhba returned in June 2019 and were to fully recover in two-three months, according to Russia’s Transneft[8]. However, at the end of 2019, the deliveries were not fully recovered, and the Polish company PERN informed about a need of further decontamination of oil in its part of the oil transport system within the next months[9]. This aspect is linked to negotiations on financial compensation led by customers for Russian oil, such as the oil pipelines and refineries operators from Poland, Germany, Ukraine, and Czech Republic. There were several meeting in summer 2019, which led to agreements with clients, with the exception of entities from Poland and Germany waiting for full estimation. The negotiations include a case for compensation of undelivered oil and damage to infrastructure. The latter can be estimated only after the system is cleared.

The prospects for 2020 are further talks on compensation, wherein the Russian side will struggle to keep its viability for its customers. In the meantime, countries hurt by the crisis will look to diversify oil supplies, as for instance, Poland did with Saudi Aramco in 2015. Because of PKN Orlen’s control over refineries in Poland, Lithuania and Czech Republic, this trend might result in a regional decrease of dependence on Russian oil supply. Russia might increase the standards in oil sector but -as Oxford Institute for Energy Studies argues – any change to Russia’s domestic oil pipeline regulation, coupled with lines of greater control and more checks, may increase the costs for Russian oil producers, which are looking to cut costs, as they seek to invest in new oil exploration and extraction[10].

Russia’s Transneft and Rosneft embroiled again in “crude wars”

NATURAL GAS

Ukraine-Russia gas deal: a tale of important mutual compromises and peculiar context

After months of tedious negotiations, multiple rounds of trilateral talks in EU-Russia-Ukraine format[11], a quadrilateral talk[12] , and a final talk[13] between Naftogaz, Gas Transmission System Operator of Ukraine, and Gazprom, Ukraine and Russia finally reached a landmark package agreement that lays down the conditions under which a new contract for the transmission of Russian gas via the Ukrainian system will be concluded for a period of five years, and which is expected to be signed by the end of the week[14].

The protocol includes an arrangement, under which three agreements will be signed[15]: i) an agreement between Gazprom and Naftogaz for organization of Russian gas transportation through Ukrainian territory ; ii) an inter-operator agreement between Gazprom and Gas Transmission System Operator of Ukraine; iii) a transport agreement signed by Gas Transmission System Operator of Ukraine. Naftogaz will book the gas capacities on behalf of Gazprom, and latter will pay the transit fees to Naftogaz. In this respect, two important aspects for the overall architecture of package agreements are worth mentioning: National Commission of Ukraine for Energy, Housing and Utilities Services Regulation (NCER) has recently approved the tariffs for Russian gas transit at $16.01 a day per 1,000 cubic meters at the border with Russia and at $9.68 a day per 1,000 cubic meters at the border with Slovakia; it also granted certification to Gas Transmission System Operator of Ukraine [16].

The amount exact of money to be paid by Gazprom for the gas transit depends on the booked capacities, and the package agreement stipulates that Gazprom will transit 65 billion cubic meters (bcm) in 2020, and 45 bcm per year between 2021-2024. Ukrainian Minister of Energy said that over the five years of gas transit agreement, Ukraine will receive $ 15 billion[17]. It is pertinent to mention that 40 bcm per year is the minimum gas amount needed for preservation of Ukrainian gas transmission system’s profitability.

Both the duration and the volume of the package agreement reflect both sides’ compromises. Ukraine sought a 10-year contract and 65 bcm per year, while Russia’s proposal had been one-year contract (with main preference for the extension of the current contract, which would have basically implied that EU Third Energy package would not have been applied), with significant smaller volumes. Other important elements on which both sides made significant concessions were the legal claims and direct gas supplies (see below).

Hence, during the negotiations, one of the principal pre-requisite of Russia, voiced directly by Kremlin, was the abandonment, by Ukraine, of all the legal claims against Gazprom. In the end, both sides agreed on the payment (by December 29), by Gazprom, of $2.9bn debt including interest, to Naftogaz, in accordance with Stockholm arbitration award of February 2018. In return, Naftogaz agreed to drop its legal claims against Gazprom for $12.2 billion, and for 1.33 bcm, and to refrain from freezing Gazprom property, assets or cash as part of its Stockholm arbitration award of February 2018. The package agreement also stipulates the termination, by Ukraine, of all current or future requirements for fines from Gazprom based on decision of Antimonopoly Committee of Ukraine.

Though nothing was officially mentioned yet about the restart of direct Russian gas imports by Ukraine, it seems that several Ukrainian companies-five according to some sources- entered into direct contracts with Gazprom for gas supplies from January 1, 2020, though neither the companies nor the exact amount of volumes are known yet. [18] In this regard, it is worth mentioning that Ukraine ceased buying gas directly from Russia in 2015, and during the series of negotiations the Russian side’s proposal, repeatedly put forward, was “direct gas supplies in the transit package”. As for the price of the possible direct supplies, the last paragraph of the protocol says that “the parties will consider the possibility of gas supplies to Ukraine, taking into account the pricing based on the price of the European hub (NCG) with the exception of a reasonable discount taking into account the volume of such deliveries”[19].

Finally, it is important to mention a couple of highly relevant aspects that defined and, to relevant extent, impacted the context of negotiations. The first one is the Normandy four summit of Paris of December 9, where “Ukraine and Russia at the presidential level come to some kind of compromise version of the new transit agreement” [20] . The second one is the US sanctions of “Protecting Europe’s Energy and Security Act of 2019”, enacted into the National Defense Authorization Act (NDAA), and which target the companies building the Nord Stream 2 pipeline. Though NDAA was signed on December 20, the sanctions’ introduction into this bill had been acknowledged and expected beforehand. Therefore, some consider that the perspective of sanctions against Nord Stream 2 would have been a sizable leverage for Ukraine in the negotiations with Russia: despite that sanctions, most likely, cannot block the project; they could delay it for a few months, as Chancellor Merkel’s transatlantic coordinator acknowledged[21]. However, in this regard, it is important to mention that though NDAA already come into force, the sanctions have not been yet enforced, as the Secretary of State, in consultation with the Secretary of Treasury, have 60 days (counting from NDAA’s come into force) to identify “vessels that engaged in pipe-laying at depths of 100 feet or more below sea level for the construction of the Nord Stream 2 pipeline project”. Some commentators took the Allseas’ suspension of Nord Stream 2 pipelay activities as a complete halting, but the company carried out this measure as a safeguard for its interests during the period preceding the sanctions’ implementation.

Overall, the Ukraine –Russia gas agreement is the result of series of mutual compromises, and also of a couple of exogenous political factors: the Normandy summit and the introduction of the sanctions against Nord Stream 2 in the NDAA.

OSW: A ‘last-minute’ transit contract? Russia-Ukraine-EU gas talks

LNG in Europe : overflow, high inventories, and low spot prices

The European LNG market has been characterized this year by the following salient features : overflow of LNG (driven by the ramping up of export capacity of players such Qatar, the United States and Russia , and the reversal of a multi-year trend of higher Asian LNG prices); inventories at record level (mainly determined by decrease of demand in Asia, and hence a global surplus of LNG that has been partly absorbed by markets in Europe); and record low spot prices (this year, the spot natural gas prices in Europe declined to a 10 year) . Wood Mackenzie estimates LNG imports for 2019 at nearly 82.5 million tonnes, which is up 34 million tonnes year over year[22].

Nevertheless, it is important to mention that largest volumes of LNG imports have been absorbed by the northwest European terminals, which-mainly due to their markets’ flexibility and liquidity- were able to take advantage from a loose global market, and act in a counter-seasonal way by increasing the LNG imports during winter 2019. As LNG imports in Europe reached a record, so the trading on the TTF intensified to record levels, which reinforced its position as one of global gas benchmarks, and also the role of north-western Europe markets in the global LNG trade. Furthermore, the role of TTF as global gas benchmark significantly contributed to the price correlation between European and Asian spot markets in 2019, which is expected to remain tightly linked also in 2020.

Overall, Europe’s demand for LNG is expected to remain robust by 2030 at least, due to decreasing domestic gas production, the aim pursued by many European countries to phase coal out over the next decade, and lack of supply alternatives. Moreover, it looks that global LNG demand may fail to meet the supply growth until 2021, whereas gas prices in Europe and Asia could stay below the 2016-2018 levels until at least 2021[23]

US LNG arrives in Ukraine

But when it comes about LNG in Eastern Europe, it is worth mentioning that first tanker loaded with LNG from the United States destined to Ukraine arrived at Polish LNG terminal Swinoujscie on November 19, 2019. The delivery is the outcome of the trilateral Memorandum of Understanding (MoU) signed between the United States, Poland and Ukraine on August 31, 2019, on energy cooperation. The MoU opens the possibility for Poland to send 6 billion cubic meters of gas to Ukraine starting 2021. The agreement mentions U.S. funding possibility for Poland-Ukraine gas interconnection, which is important for the project but not yet fully embraced by Ukrainian side, which still sees as satisfactory the existing reverse flows volumes.

Currently, Ukraine is capable of importing about 1.5 billion cubic meter /year of gas from Poland , but the gas transmission between the two countries may reach 6.6 bcm by 2021, when the Ukraine-Poland interconnector could o be ready (the Komarno compressor station in Lviv was completed in October 2019, and the design capacity of the modernised section is 15 million cubic meters of gas/day from Ukraine to Poland, and 18 million cubic meters/ day in the reverse flow mode from Poland to Ukraine).

The deal marks another stage of expansion of US LNG in Central and Eastern Europe, especially after a series of long term contracts concluded by Poland’s PGNiG with US LNG producers, and which dramatically expand the company’s LNG portfolio after 2022.

LNG from the USA through Poland may again reach Ukraine

ELECTRICTY

New electricity market design : the ongoing dilemma of expansion of renewables versus adjusting to system’s capabilities likely to continue in 2020

New electricity market design is a concept revealed by the European Commission in February 2015[24], and it consists of new rules for energy market included in the overall EU Energy Strategy. This strategy aims to thoroughly address issues such as energy security, market integration, energy efficiency, de-carbonization and Research and Development. Introducing a new electricity market design is one of the goals of “Clean energy for all Europeans package”[25] (dubbed the “Winter Package”), which plays a key role in EU’s transition towards a climate neutral economy. In this respect, the EU’s electricity market plan is seen as a chief tool in realizing the Union’s transition to a low carbon economy by 2050.

New electricity market design is to be decided yet but it already includes idea of network integration, i.e. in form of deeper cooperation between energy operators in EU by empowering ENTSO-E and ACER. The most radical idea is to create a pan-European operator transferring the energy security entitlements from Member States to a yet to be defined body. A less ambitious idea introduced by the “Winter Package regards the establishment of Regional Centres of Coordination, which could share responsibility for regional energy flows with the national transmission system operators[26].

But the “Winter Package” has also set targets for Member States’ grids: cross-border power connections-network interconnectivity-with a capacity of at least 10 percent of installed electricity production by 2020 of any national market volume[27]; the opening of 70 percent of national interconnectors to pan-European energy trade on state borders until 31 December 2025[28]. The assumption is that higher coordination and interconnectivity would lead to bigger energy flows, lower prices, and deeper de-carbonization of energy market, which would address and serve the goals of “Winter Package”, specifically, and of EU Energy Strategy, in general.

However, some Member States argue that new electricity market design has physical limitations. Thus, national networks system operators in Poland and Germany claim that further coordination inside ENTSO-E and ACER should not lead to a transfer of power from the Member States to a new body because those are the member states that are still responsible for energy security[29].

There are also physical limitations to the goal of higher interconnectivity. According to the Polish operatorPolskie Sieci Elektroenergetyczne, in order to integrate still unstable renewable energy into an integrated market without spoiling the market functioning, it needs to be introduced an efficient system, which will not work by just integrating the markets per se. Thus, in order to keep the energy supply stable and to address the grid capacity limitations , Germany had to invest close to 1 billion euro in 2015-17 for adjusting the market to the system’s capabilities[30]. One of the solutions is to create an expanded specified capacity as a cold reserve to be switched on in case of need and to be kept alive by state subsidies[31]. This has been bringing Member States to discuss about different models of subsidy like capacity market (introduced in Poland) or strategic reserve (the German solution)[32].

Some Member States fear that new electricity market design will further lead to an undermining of their own capacities vis-à-vis of the competitiveness represented by the renewable generation. This competitiveness is welcomed from the perspective of climate policy, but it challenges the stability needed from the perspective of energy security policy. This dilemma will define further discussions on new electricity market design in 2020. Possible acceptation of climate neutrality goal would probably give priority to expansion of renewable generation, but the question of stability of energy supply will still have to be met within a common and efficient EU answer.

OIL AND GAS GEOPOLITICS

Abqaiq attack-an incident highlighting the geopolitical risks posed by one state actor

The September attack of Saudi Aramco’s oil facilities significantly impacted both the oil markets and the experts, as it revealed that an infrastructure considered of high security can be the target of Iranian cruise missiles and drones, and power rivalry in the Gulf can be a serious destabilizing factor, triggering not only political outcomes but strategic and economic ones as well.

On September 14, 2019, twenty-five drones and missiles hit two sites, Abqaiq and Khurais oil facilities, taking out 5.7 million barrels per day of crude oil, and forcing Saudi Arabia to shut down half of its oil production, and 5 percent of the total global daily supply of oil. For context, US crude oil production is as much as 12 million barrels per day. The Houthi rebels in Yemen claimed responsibility, but the United States officially pointed the finger out to Iran, who would have retaliated in response to US sanctions’ “maximum pressure” campaign against Tehran. Though Iran denied responsibility for the attack, the scale, the sophistication, other precedent attacks of Tehran targeting critical energy infrastructure of political rivals (attacks on : oil storage facility in UAE; Saudi East-West oil pipeline; Exxon Mobil’s headquarters in Iraq), and ultimately Iran’s harassment of oil tankers traveling through the Strait of Hormuz, all points to a state actor. They also fit the pattern of Tehran’s counter-measure strategy, aimed at maximising the costs of US sanctions campaign against it. Furthermore, it seems that Iran’s leadership approved the attack, and it was decided to stop “short of direct confrontation that could trigger a devastating U.S. response”[33].

By highlighting the fragility of oil supply chain from Persian Gulf , but also the vulnerability of Saudi Arabia’s lifeblood industry, the attack was seen by some as one of the most important geopolitical risks of the year for energy sector. Overall, the raise of geopolitical tensions in the Middle East-and among them there is the Abqaiq attack- have been determining major Northeast Asian buyers like India, Japan, South Korea but also from Southeast Asia (Vietnam, Indonesia) to pivot to US crude oil[34].

Moreover, there is also a significant economic dimension revolving around the Abqaiq attack. Markets’ reaction to the attack was a quick one, as “Abqaiq is a gas-oil stabilization facility that is unique in the international oil and gas industry because of its function, location, and scale”[35]. Abqaiq is world’s largest oil processing facility and crude oil stabilization plant (it removes the volatile lighter hydrocarbons, sulphur, and other impurities) with a processing capacity of more than 7 million barrels per day : basically, one of the largest in the world, and it fulfils also the function of separating oil from other hydrocarbons (methane, propane, butane). Hence, in the aftermath of attack, Brent crude futures rose as much as 19, 5% , to $ 71.95 per barrel, whereas US West Texas Intermediate as much as 15, 5%, to $ 63.34, the biggest increase since December 2008.

Nevertheless, Aramco quickly restored the capacity at pre-attack level earlier than expected (two weeks after the attacks, Saudi Arabia claimed that it restored production at pre-attacks level), most likely to offset the impact of the attack on Aramco’s IPO, which held nearly three months after the attacks occurred.

Russian energy majors switched to euros for fear of U.S. sanctions, a move in line with European Commission’s strategic aims

At the end of October, Rosneft, Russia’s largest oil company (6% share in world’s oil production ; and 41% share of Russian oil market) announced that it fully switched all its contracts (crude oil, oil products, liquefied petroleum gas, petrochemicals) to euros from U.S. dollars . Earlier, it had stated that it had set the euro as the default currency for all its new contracts.

The main rationale behind Rosneft’s move was, according to its CEO, Igor Sechin, specifically the intention to shield the company from U. S. sanctions. At the same time, the move matches Russian President’s strategy to de-dollarize Russia’s economy in general, and the energy transactions, in particular.

More, Russia’s largest LNG producer, Novatek, announced as well that switched to euros-not for all-, but for most of its contracts, also with the aim of shielding from U.S. sectoral sanctions.

Rosneft’s and Novatek’s move to make of euros the currency of international settlements coincides with EU’s aim to expand the international role of euro in energy role. Last year, the European Commission issued a recommendation “on the international role of the euro in the field of energy”[36], aiming at a wider use of euro in international agreements and non-binding instruments related to energy, which was followed by a public consultation[37].

In this regard, it important to mention that Brussels did develop contacts with Moscow in order to expand the role of euro and rouble in energy transactions : hence, on June 13, the then-EU Commissioner for Energy Union, Maros Sefcovic, met with Russian Finance Minister, and one of main focus was the use of euros and roubles in trade settlements, including energy trade. According to Russian media, a working group was created for this purpose[38] .

Furthermore, promoting the use of euro in the energy sphere and markets is also high on agenda of the new Commission. Hence, in a letter addressed to Kadri Simson, the Commissioner for Energy, Ursula von der Leyen , the President of the European Commission, asks her “to look at ways to sharply increase the use of the euro in energy markets” [39].

Yet, the switch to euro has a major downside, as under the current policy of European Central Bank, the financial institutions are required to pay interests for placing excess reserves with the central bank. However, it seems that for the two Russia energy majors, this factor is less deterrent than the US sanctions.

Russia struggles to affect international commodity pricing, whereas in the Middle East competition for crude oil benchmarks increases

Russia eyes the establishment of the price of its crude exports domestically. St Petersburg International Mercantile Exchange (Spimex) plans to offer an electronic platform where buyers and sellers can transact, and the exchange can calculate an average price based on transaction[40]. Spimex intends to involve producers, not only traders, in price calculation, and to extend the new pricing to all of the oil sold on spot market, including the ESPO blend sold to the Asia-Pacific market, a move backed by some oil companies[41] that are also Spimex’s founders (Rosneft, Lukoil, Surgutneftegas, Gazpromneft are among the founders ).

This new project of Spimex was expected to be set up by the end of the year, but at the date of this writing it hasn’t been set up, nor updates about its launching have been issued . Crude oil futures, with Urals as an underlying asset, started being traded on Spimex in Russia in November 2016; Urals crude oil futures trading uses global oil trade standards, which involve physical delivery settlement as the payment method, U.S. dollar as the transaction currency, contract size of 1,000 barrels, and standard delivery equal to equal to 720,000 barrels. But neither futures contract for Urals blend, nor Russian export blend crude oil (Rebco) futures launched at the New York Exchange in 2006, succeeded to attract interest.

Until new oil pricing will be ready, Spimex announced that the first cargo of ultra-low sulphur diesel was exported for delivery to a Northwestern buyer in settlement of physically-delivered SPIMEX USLD December Futures contract; this type of contract was launched on November 11, 2019 [42].

Whether this new Spimex’s initiative would be successful it remains to be seen, but this is genuine geoeconomic move, which reflects Russia’s aim to strengthen its role on energy markets. Despite being a major producer of oil, and also despite its key position in OPEC+, and the role played in reaching the series of agreements between OPEC and OPEC+, Russia has so far been largely unable to affect international commodity pricing.

Meanwhile, the Abu Dhabi National Oil Company (Adnoc) and nine of world’s largest energy traders have partnered with the Intercontinental Exchange (ICE) to set up world’s first Murban crude oil futures contracts, which are due to be launched in the first half of 2020. This contract will be a physically delivered contract, on a free on board basis, with delivery at Fujaraih (UAE). The new local exchange will be ICE Futures Abu Dhabi (IFAD). Energy majors as Shell, BP, Total, PetroChina, Japan’s Inpex, Korea’s GS Caltex, Thailand’s PTT, Japan’s JXTG, and Vito Group agreed to become partners and will guarantee liquidity to the market and Murban futures contracts.

Yet, in this regard, it is important to mention that introduction of Murban benchmark will increase the liquidity competition in the Middle East, and at the same time, it will challenge two well-established benchmarks in place: DME Oman and Platts Dubai.

CLIMATE POLICY

In order to be effective, the European New Green Deal should be an inclusive one

On December 11, 2019, the European Commission unveiled the hallmarks of the European New Green Deal. This is a new comprehensive package of proposals, aimed at fighting climate change by de-carbonizing the whole European economy. It consists of postulates enforcing heavy changes in economic activities, as the EU aims to reach net-zero greenhouse gas emissions by 2050, a goal that will be enacted in a “Climate Law” to be presented in March 2020.

The New Green Deal is expected to accelerate the implementation of EU climate policy by 2030, with a 50-55% cut in greenhouse gas emissions to replace the current 40% goal. It should result in investment for 260 billion of euro per year until 2030 (1,5 percent of EU GDP in 2018). The European Commission aims to include 25 percent share of climate mainstreaming[43] in any European programme, and the European Emission Trading Scheme is to be revised in 2020 so the CO2 prices will be increased to a level guaranteeing investment in renewables, and penalizing high-emission generation, especially those resulted from coal utilization.

The Commission should also announce the rules of green financing in private sector until fall 2020. It means that the financing will be heavily influenced by the climate agenda. Looking at European Investment Bank’s decision to stop supporting nuclear and natural gas from 2021, it might mean hampering the investment in those sectors. This could result in serious problems of energy transition processes in countries of Central and Eastern Europe, which look for nuclear and gas as a tools of this transition[44].

There is a possibility that energy investment will be scrutinized from the perspective of sustainability, and the energy projects scored as unsustainable will have difficulties to get financial support from EU funds like European Investment Bank[45]. It might bring further financial support for renewables, gas and hydrogen projects, which are promoted in Western Europe, especially in Germany, but it would also likely create further discontent.

This quarrel might lead to further difficulties in application of common Energy and Climate policy in EU, so a consensus including the interests of all stakeholders is necessary[46]. In this regard, Poland announced that it is not ready to agree on climate neutrality goal of the New Green Deal. The EU countries decided to negotiate concrete energy transition support schemes until June 2020, hence the goal could be agreed afterwards. A „just transition mechanism” with funds of around 100 bln euro is being discussedIt is to be decided yet about the sources of funding and targets of this investment[47].

The exact rules of introducing Green New Deal are to be decided in 2020. The Deal aims to support innovative and sustainable energy. Nevertheless, because of different situations of Member States , the Deal should include support for fair energy transition. The consensus would enforce the common Energy and Climate policy but possible obstructions will lead to further significant delays in implementation of the policy.

PKEE: Execution of climate policy requires major funds

[1] https://www.reuters.com/article/us-saudi-aramco-stocks/goldman-may-stabilize-saudi-aramco-shares-following-ipo-idUSKBN1YS0ZD

[2] Aramco was founded in 1933, when Saudi Arabia and Standard Oil Company of California (SOCAL) signed a concession agreement. In 1973, the Saudi government purchased 25 % stake in Aramco. In 1974, the stake of Saudi state was increased to 60% , and in 1980 the Aramco’s nationalization was completed.

[3] https://www.argusmedia.com/en/blog/2019/december/10/deeper-opec-cuts-put-compliance-on-shaky-ground

[4] https://www.sciencedirect.com/science/article/pii/S2211467X19300677#sec2

[5] Ibid.

[6] https://biznesalert.pl/rosja-zanieczyszczona-ropa-goraczka-naftowa-transnieft-bankructwo-analiza-energetyka/

[7] https://www.osw.waw.pl/en/publikacje/analyses/2019-05-08/dirty-oil-greatest-crisis-history-druzhba-pipeline

[8] https://www.spglobal.com/platts/en/market-insights/latest-news/oil/061119-crude-volume-shipped-via-druzhba-to-return-to-normal-in-2-3-months-transneft

[9] https://biznesalert.pl/zanieczyszczona-ropa-oczyszczanie-pern-negocjacje-rosja-energetyka-ropa/

[10] https://www.oxfordenergy.org/publications/the-druzhba-pipeline-crisis-the-lessons-for-russia-and-for-europe/?v=9b7d173b068d

[11] The trilateral negotiations took place on July 17, 2018, January 21, September 19 and October 28, 2019.

[12] The final trilateral talk included also Germany and was held on December 19, 2019, in Berlin.

[13] They were held on December 20, 2019, in Minsk

[14] The existing gas contract expires on December 31, 2019