Weekly energy security summary to 12 June

  • Antonín Beránek
  • 13.6.2017 12:40


The primary recent drive behind the oil market has been a diplomatic conflict linked to the sanctions of several Arab countries against Qatar, who they suspect of supporting terrorism (in connection with Iran) and destabilisation of the region. Qatar exports more than 500 thousand barrels of oil per day. The involved countries are part of OPEC and have participated in the OPEC+ agreement to reduce production. On 25 May, this agreement was extended until the end of March 2018.

However, the latest development influenced prices and drove the price for a barrel to more than 50 USD before it fell again. This was likely caused by concern about violation of the arrangement. Had Qatar started to supply more oil to the market, it could seriously threaten the latest agreement. However, long-term experience indicates that business is business, and, despite the rivalry between Saudi Arabia and Iran, it has always been possible to find a solution to keep oil prices high, as both countries prefer it.

Another factor which could influence oil prices in the short term, aside from the aforementioned issue with Qatar, is the infamous report of U.S.' oil stocks. It is expected that the stocks should be reduced by 3.5 million barrels this week. Reducing oil reserves in the U.S. would thus occur for the ninth time. If this is confirmed, the price for a barrel would, once again, rise above 50 USD.

Pressure on Qatar was initiated by U.S. President Donald Trump, who considers the situation his triumph. Qatar itself used to be a U.S. ally, but Iran continues to be a thorn in the U.S. President's side, despite progress in negotiations of the peace program regarding the use of nuclear energy.

Natural gas

After 22 May, when prices reached their local maximum at almost 3.4 USD per million BTU, market participants concluded that the market was "overbought" and began to dispose of so-called long positions (expecting further price growth). Therefore, on 5 June, prices fell to 2.93 USD and currently hover around 3.05 USD.

An important factor is also the weather in the U.S., which is still not too cold for heating, nor hot enough to use air conditioners, therefore gas consumption is low and, according to the weather forecast, this is not going to change in the next two weeks. Therefore, there is no potential for price growth.

Centrica, the operator of Rough, Britain's largest gas storage facility on the southeastern coast of England, stated that problems with filling the reservoir, which began last year, will not be eliminated before March 2018. Rough might have up to 70 % of UK's natural gas reserves. As a result of the malfunction, gas pumping from the reservoir is also severely limited. Gas imports into the United Kingdom, therefore, grew by 33 % over the past winter, mostly due to increased supplies from Belgium and Norway. On the other hand, imports from the Netherlands and imports of liquefied natural gas (LNG) decreased by 31 % and 56 %, respectively. In the UK, there are two major projects for building gas storage capacities, but both are only in the initial stages of the approval process and capacity restoration is not expected sooner than in six years. The aforementioned situation is, therefore, a test of the country's energy security. However, the issue has so far been managed without any major trouble.

Nuclear energy

The International Atomic Energy Agency (IAEA) stated that 10 new nuclear power plants (NPP) were put into operation last year. The total number of plants in service is now 448 and the total output, as of 31 December 2016, was 391 GWe, which is a historical maximum. In the last year, three blocks were permanently put out of service and the construction of two nuclear plants in China and one in Pakistan has begun. In total, 61 nuclear power plants are currently being built in the world. Nothing suggests that this energy source should be on the decline.

The Egyptian Ministry of Energy announced on 29 May that everything is ready for the signing of an agreement to build the Ed-Dabaa nuclear power plant on the Mediterranean coast, which would have the output of 4 x 1200 MWe. Russian Rosatom has already agreed on three out of the four contracts with the Egyptian partners. The last one, which concerns the launch of the NPP and its operation, is now being verified for compliance with Egyptian laws. In connection with this project, Russia will provide Egypt with an export credit worth 25 billion USD.

After their bankruptcy in March, Westinghouse, a U.S. supplier of nuclear technology, believes in its future in the field of nuclear power. According to Westinghouse CEO Jose Gutierrez, the company is undergoing reorganisation and focuses on completing four existing U.S. projects and starting a new AP 1000 project in China. At the same time, several new contracts for nuclear fuel supplies were successfully negotiated. Among other things, the company has prepared an offer on fuel supply for VVER-440 blocks, one of which can be also found in the Czech power plant Dukovany. This product is supported by European funds and aims to increase the energy security of European NPP operators. Once again, a competitor to the time-tested Russian supplier TVEL emerges.

On 7 June, the German Constitutional Court declared the nuclear fuel tax – which the NPP operators in Germany had to pay in 2011-2016 – to be unconstitutional. Therefore, Germany will be forced to return the amount of approximately 6.3 billion euro to E.ON, RWE and EnBW, whose stocks have increased after this information has been released. The economic efficiency of this energy source, unpopular in Germany, is therefore further increasing and the arguments of those who oppose the move towards alternative sources are getting stronger as well.

Alternative energy

On 1 June, U.S. President Donald Trump refused his country's participation in a new climate deal, as the only one at the G7 leaders' meeting. Representatives of other countries claim that the agreement is valid even without the U.S.' involvement. According to Trump, the U.S. would lose thousands of jobs with this agreement. However, his opponents argue that the implementation of new green energy sources would, on the contrary, create a great number of positions.

The South Korean government has come up with a plan to change the country's energy mix. According to it, the nuclear energy share should be reduced from the current 30 % to 21.6 % and the coal share from 40 % to 21.8 % by 2030. This decrease is to be replaced by natural gas (LNG), the share of which should increase from 18 % to 27 %, and by renewable sources which are to increase from 5 % to 20 %. This ambitious plan brings a number of problems, including the necessity to find solutions for unfinished power plants, which will not be needed in the future. Given that the South Korean economy is one of the largest in the world, this program is a strong signal for the promotion of alternative sources, yet at the same time, it is an extraordinary risk for the country. An increase in electricity prices is very likely.

About author: Antonín Beránek


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