Iranian, Saudi Interests Conflict in Iraq’s Energy Market

The lack of infrastructure for supplying electricity makes Iraq a battleground for energy between regional rivals Iran and Saudi Arabia

Energy suppliers are trying to use energy exports as a key factor in shaping foreign policy and their relations with neighbors and other countries. Iran and Saudi Arabia as two key members of the Organization of Petroleum Exporting Countries (OPEC) have their own priorities and interests in the region. Their opposing interests have forced them to support opposing sides in regional tensions, such as in Syria and Yemen. U.S. sanctions against the Iranian energy sector have given an opportunity to OPEC and non-OPEC members to export more oil to the regional and world market to take Iran’s stake in the market.

Presently, Iran exports electricity to neighboring countries and according to Iran’s 20-year development, by 2025 they must prepare all the required infrastructure to become a regional electricity hub. Iraq is the biggest importer of Iranian electricity. Both countries signed an agreement in 2005 to export Iranian electricity to Iraq.

Iraq, with huge oil reserves, has a problem in generating the required electricity and must import from its neighbors. The Iraqi government can only supply 68 percent of its electricity in normal conditions. With increasing temperatures, especially in the summer, this ineffective capacity is severely reduced. Iraq faces a shortage of 5,000 megawatts (MW), although several power plants are under construction, but the electricity demand of the country is increasing by 7 percent annually. Since the first Gulf War in 1990, the power generation infrastructure has been abandoned in Iraq. This situation worsened after the invasion of Iraq in 2003. After the end of the Gulf War, Iraq tried to attract foreign technology and financial capital to recover oil production capacity and construct an electricity grid. The Daesh problem and its negative effect on Iraqi national security is another major factor that has led to Iraq becoming an electricity importer.

Iran and Iraq have signed an agreement over exporting 150 MW of electricity to Iraq annually. This agreement is extended every year. By Feb. 11, 2019, Iran extended electricity to Iraq for one more year. Iraq imports 120-130 MW annually. But due to sanctions and Iraq’s financial problems, Iraq was not able pay for importing electricity. According to Iranian officials, Iraq is interested in paying its debt and is looking for a way to send money to Iran. Homyon Hairi, deputy to the Iranian minister of energy, believes that, “There is a positive outlook in this regard, which is to be followed by joint executive working groups.”

Iran’s gas customers

Iraq and Turkey are Iran’s major natural gas buyers. Iraq began importing gas from Iran in late June 2017, with imports of about 14 million cubic meters per day, with Turkey importing about 30 million cubic meters a day. Iran plans to export 25 million cubic meters of gas daily to Baghdad and to transfer gas to Basra province.

As mentioned earlier, Iraq is unable to pay for electricity and natural gas from Iran. According to the latest statics released by the Iranian Ministry of Oil, Iraq must pay about $2 billion to Iran over natural gas and electricity imports. It is expected to solve this problem during Iranian President Hasan Rouhani’s visit to Iraq. Rouhani has shown interest in exporting more electricity to Iraq; though he has not mentioned the methods they may be able to agree upon in paying the electricity and natural gas debt to Iran. It seems both presidents have not agreed on this issue.

Last summer, Iran cut the electricity flow to Iraq due to high domestic consumption, according to Reza Ardakanian, Iran’s minister of energy. Iran’s neighboring country has a wide range of demands, partly through Iran’s transmission lines, adding: “We are in constant touch with Iraq, and just a few days ago, the Iraqi Minister of Electricity was here and talked to us.” Stopping the export of electricity from Iran has aggravated the problem of electricity in Iraq, causing massive street protests, especially in Shiite cities, against the central government as well as against Iran.

Iran cutting electricity provides an opportunity for Saudi Arabia to use energy investments in Iraq to increase its political influence. According to the spokesman for the Ministry of Electricity, Musab Sari al-Mudaris, Saudi Arabia has agreed to launch a solar power plant with a production capacity of 3,000 MW in northern Saudi Arabia near the Iraqi border, and each megawatt of electricity will be offered to Iraq at $21, which is equal to one-quarter of Iran’s electricity exports to Iraq. Saudi Arabia has not only put electricity prices at a quarter of Iran’s electricity prices but also exported three times more exports than Iran. Saudi Arabia continues to compete with Iran in the economic sphere by building a solar power plant in Iraq and selling electricity to that country.

After Rouhani’s visit to Iraq, Saudi Commerce and Investment Minister Majid bin Abdullah Al Qasabi visited Iraq and met with Iraqi officials. According to an official statement by the Iraqi president, Iraq is interested in establishing a mechanism for joint economic interests with regional countries, especially Saudi Arabia. Last year, the Iraqi government showed interested in developing and boosting its relations with Arab countries. Iraq and Saudi Arabia signed an agreement in 2017 to form a coordinating council.

Saudi Arabia is seriously trying to expand its ties with Iraq with the aim of limiting Iran’s influence in Iraq, with at least a counterbalance to it. Of course, the United States has also contributed to this strengthening of relations between Iraq and Saudi Arabia, especially as the United States, like Saudi Arabia, wants to reduce Iran’s influence in the region. But the point is that all this competition will be beneficial for Iraq.

The Saudi perspective

Saudi Arabia is pursuing its main goal by strengthening its ties with Iraq: First, the decline of Iran’s influence in Iraq, and the other in attracting Iraq to its Gulf-Qatari axis. Saudi Arabia has concluded that the policy that has taken place in Iraq since 2003 is wrong and that Iraq is a fundamental part of the Arab world’s geography.

Saudi Arabia and Iraq have not cooperated for more than 27 years, and Saudi Arabia is rapidly seeking to expand ties. In the sacred city of Najaf in Iraq, Saudi Arabia seeks to establish a consulate and have a rich presence among the Shiites as well. According to Iraqi officials, this consulate will be set up soon. Cooperation between Saudi Arabia and Iraq is at an early stage and in the meantime, meetings have been held at high levels in which Saudi Arabia has pledged a $100 billion investment in Iraq and to rebuild Sunni cities such as Fallujah, Ramadi, Tikrit and Mosul.

The Saudis have focused their efforts in the province of Basra, because this province is considered the richest Iraqi province. With the implementation of large projects in the province, the Saudis hope to compete with the Iranians or even overcome them.

Iraqi officials hope that Saudis will use their money in road construction projects and re-activate the Iraqi oil export pipeline to the

Red Sea, which has been closed since 1990.

A new alliance

For about six months, officials and senior officials from Saudi Arabia and Iraq have been meeting, and there are ongoing efforts to work together and reach a new alliance. Saudi Arabia is using investments in multiple countries’ infrastructure and energy sectors to boost its political influence in the country and also trying to affect foreign policy orientation. Saudi Arabia plans to invest in an area of 1 million hectares in the livestock and poultry industry of Iraq.

The Saudi initiative, described as an opportunity to confront the influence of Iran in Iraq, is the result of efforts by former Iraqi Prime Minister Haider al-Abadi to balance ties with his neighbors. The project was initiated by the Saudi Arabian Cooperation Council and Iraq, which was founded in October 2017.

Saudi Crown Prince Mohammed bin Salman – on his visit to India, Pakistan and China – tried to use investments in these countries’ energy sectors to reduce Iran’s role in these countries’ energy basket and energy security. Iran and Saudi are Shiite and Sunni countries looking to expand their sphere of influence in the region. Iraq with both Sunni and Shiite people is very important for Iran and Saudi perspectives and it seems that in coming years both countries will be using all instruments to increase their presence in Iraq and reduce the influence of other countries in Iraq. Saudi Arabia, with huge financial capability, will be able to play an important role in Iraq post-Daesh. Iraq needs billions of dollars for construction post-Daesh and is an opportunity for Saudi Arabia to increase its influence. Iran never wants to lose its key role in Iraq and in Iraqi Shiite groups. Iran also wants to have a role in Iraq in the post-Daesh period.

Geopolitical competition between Iran and Saudi Arabia will continue in Iraq. Saudi Arabia and other Arab countries are seeking to increase their influence in Iraq, and new U.S. sanctions against the Iranian oil sector could provide such an opportunity. However, coping with Iranian influences from politics to trade is difficult.

//www.dailysabah.com

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Saudi Arabia’s Plan to Lure Iraq From Iran

A Saudi economic delegation visited Iraq on April 3, seeking to promote the expansion of diplomatic and economic relations between the two countries—and to give Iraq an alternative to growing Iranian ties. 

This was the second meeting of the Iraqi-Saudi Coordination Council, which held an initial meeting in 2017. The Saudis offered a $1 billion loan for the creation of a sports complex to be known as Sport City. The council also announced the establishment of consular centers for visa services in Baghdad and two other Iraqi cities.

These positive developments in Iraq-Saudi relations are the latest chapter in a new Riyadh approach to Iraq which began in late 2015. Until then, Saudi Arabia refused to recognize the Shia-dominated government that came to power in Baghdad after the 2003 US invasion. From 2003 – 2014, Saudi Arabia tried to confront Iran’s influence in Iraq and the rise of pro-Iranian Shia political groups by supporting the Sunni insurgency against Iraq’s central government. 

This policy did not succeed, and, in a major turnabout, Saudi Arabia re-established diplomatic relations with Iraq in late 2015. Diplomatic contacts and economic relations between the two countries have increased since then, as other Gulf Cooperation Council (GCC) countries such as Kuwait and the United Arab Emirates have also improved their relations with Iraq. In the meantime, the main objective of Saudi policy toward Iraq remains the same: reducing Iran’s influence in Iraq in the context of the ongoing Iran-Saudi proxy war.

Iraq’s economic, diplomatic, and religious ties with Iran have grown despite efforts by the United States and Saudi Arabia to diminish them. In 2016, Iran was the third largest exporter to Iraq after China and Turkey, and accounted for 16 percent of Iraq’s total imports. Iranian religious tourism to the Shia holy cities of Najaf and Karbala is the leading source of tourism revenue for Iraq. Even more significantly, Iraq, despite its own considerable energy sector, imports a large amount of natural gas and electricity from Iran. Iran also enjoys significant political influence in Iraq and has developed close ties with several Shia and Kurdish political factions.

From the Saudi point of view, the most important dimension of Iraq’s dependence on Iran is energy imports. Saudi Arabia is planning to provide Iraq with alternative sources of energy in an effort to reduce this dependency, but this will not be an easy task. Iraq, despite huge oil reserves, faces a shortage of electricity and relies on imported electricity from Iran to cover a portion of this shortage. Domestic electricity production in 2018 was 16,000 MWs and it also imported 1,200 MWs from Iran. Yet Iraq still faces an electricity shortage that in hot summer months exceeds 5,000 MWs.

Furthermore, in addition to direct electricity imports, Iraq relies on natural gas from Iran to produce a portion of its domestic electricity. As a result, about one third of Iraq’s electricity is produced directly or indirectly through energy trade with Iran.

In 2018, Iraqi officials intensified their efforts to find alternative sources for electricity imports for several reasons. First, Iraq has come under pressure from the United States to abide by US economic sanctions on Iran and reduce its energy dependency on that country. Given how hard this is to achieve in the short run, Washington has repeatedly provided waivers but with reluctance, emphasizing that these exemptions are temporary. The energy imports from Iran are also risky because in periods of high domestic demand, Iran might reduce or even stop energy exports to Iraq. This happened in the summer of 2018 and led to severe power outages in southern Iraq. These shortages caused massive street protests, especially in the southern port city of Basra, against the Iraqi central government and Iran.

Iran defended its reduced electricity exports to Iraq because of rising domestic needs, but Iraqi officials criticized this policy and decided to approach Saudi Arabia as a potential alternative source. This development has provided Saudi Arabia with an opportunity to use energy trade to gain more political influence in Iraq. In June 2018, the spokesman for Iraq’s Ministry of Electricity, Musab Sari al-Mudaris, announced that Saudi Arabia had agreed to launch a solar power plant with production capacity of 3,000 MWs in its northern region near the Iraqi border for electricity exports to Iraq at a discounted price. Although there has been a dispute about the accuracy of this report, the potential for energy cooperation between Saudi Arabia and Iraq remains strong and the United States is also putting diplomatic pressure on Iraq to expand these ties in order to reduce Iraq’s dependence on Iran.

The warm reaction of the Iraqi government to Saudi initiatives does not imply that Iraq will abandon its economic and diplomatic relations with Iran. Rather it appears that Iraq is trying to create a balance in its relations with Iran and its Sunni Arab neighbors. This balanced approach was evident in Iraqi President Barham Salih’s April 2 interview with Asharq Al-Awsat in which he emphasized that “Bolstering relations with the Kingdom is an integral part of our vision for what Iraq’s ties should be like.” He added, “It is in our interest to enjoy good relations with Iran based on common interests.” 

In light of Iraq’s ethnic mix and the proportional representation of Sunnis, Shias, and Kurds in its political institutions, remaining neutral in the Saudi-Iran proxy war will serve Iraq’s interests well. Hence it should come as no surprise that after his April 6 visit to Tehran, Iraq’s Prime Minister Abdul-Mahdi plans to visitRiyadh later this month.

www.atlanticcouncil.org

Nader Habibi is a Henry J. Leir professor of practice in the economics of the Middle East at the Crown Center for Middle East Studies in Brandeis University. He focuses on economic conditions of Iran and GCC countries. Follow him on Twitter: @NaderHabibi2.

Omid Shokri Kalehsar is a Washington-based senior energy security analyst, currently serving as a visiting research scholar in the Schar School of Policy and Government at George Mason University. Omid is a PhD Candidate in international relations at Yalova University, Turkey. Follow him on Twitter: @ushukrik.

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Oil may extend rally


Opec cuts, US sanctions will continue to impact crude supply in Q2

Oil prices, which gained 30 per cent on average in the first quarter of 2019, are expected to continue the rally in the second quarter and likely to trade mostly around $70 a barrel, according to industry analysts.

The first-quarter gain was the biggest quarterly rise in a decade, driven by the US sanctions on Iran and Venezuela as well as cuts by Opec and non-Opec members that were implemented in early January this year.

On Friday, the Brent rose 48 cents to settle at $67.59 a barrel while US West Texas Intermediate (WTI) futures rose 84 cents, or 1.42 per cent, to $60.14.

The oil price in the second quarter is expected to trade between $64 per barrel to $70 a barrel compared to $60 to $65 per barrel range forecast for the first quarter. Industry executives and analysts have put $67.4 a barrel median range for second quarter and as high as $80.

Oman’s Energy Minister Mohammed bin Hamad Al Rumhy on Saturday emphasised that the Sultante will remain committed to Opec agreement until the end of 2019. He predicted crude prices to trade in the range of $65 and $75 a barrel until the end of 2019.

With oil rig count falling and production remaining stagnate last week in the US while the Opec and non-Opec countries also reluctant to make up for the lost volume, the oil prices will rally further in the coming months. The other factors which will influence the oil price upward will be the US sanctions on Iran and Washington’s consistent pressure on traders to reduce their exposure to Venezuela.

“Oil price trend continued to remain upward during March 2019, showing consistent gains since the start of the year and closing little short of the $70 a barrel mark. However, prices are yet to see the peaks seen during October 2018,” said Faisal Hasan, head of investment research at Kamco. 

World oil demand is projected to rise from 99.02 million barrels per day in Q1 2019 to 99.21 million barrels per day in Q2 2019, keeping the oil prices steadily on the upward trend during second-quarter 2019.

Opec and Russia had cut oil production by 1.2 million barrels per day from January 2019 for an initial six months period, which was one of the main drivers for the surge in prices. Opec members agreed to cut 0.8 million while Russia had 0.4 million bpd cut.

Oil producers are planning to hold an ordinary meeting again in Vienna on June 25 and an extraordinary meeting on April 17-18. Reports said Saudi Arabia was trying to convince Russia to stay much longer in the pact of lower oil production, and Moscow may agree only to a three-month extension.

“Saudi Arabia, if necessary, will further reduce its production to balance oil supply and demand. Opec’s next meeting will be held by April 2019 and if Opec members and Russia agree on reduction oil production it can be expected that oil prices will increase,” said Omid Shokri Kalehsar, a Washington-based senior energy security analyst and visiting research scholar in the Schar, School of Policy and Government at George Mason University.

Kalehsar noted that the US is expected to extend waivers from Iran’s sanctions to several countries to prevent a sharp rise in oil prices. “If there is no major political tension in the oil producing region, a balance can be seen between and supply and demand by Q2 and there will be no major change in oil prices,” he said.

Meanwhile, reports said that the US has instructed oil trading houses and refiners to further cut dealings with Venezuela or face sanctions themselves, even if the trades are not prohibited by published US sanctions.

“With US sanctions taking Iranian and Venezuelan oil off the market, at the same time Opec and non-Opec producers want to see higher prices and are currently reluctant to make up for any lost volume,” said Andrew Lipow, president of Lipow Oil Associates in Houston.

In addition, the US energy firms last week reduced the number of oil rigs operating to their lowest in nearly a year, cutting the most rigs in a quarter in three years.

According to Baker Hughes, the total number of active oil drilling rigs fell by 8 to 816. Canada’s total oil and gas rig count fell by 17 and is now 88, which is 46 fewer rigs than this time last year.

Waheed Abbas/DubaiFiled on March 30, 2019 ,
https://www.khaleejtimes.com

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Energy investment fuels Saudi relations with Pakistan, India and China

audi Arabia uses oil and broader energy diplomacy to deepen the influence and impact of its foreign policy. One key pillar of Riyadh’s strategy is to use investment in other countries’ infrastructure to take larger shares in foreign markets and to decrease market share for rival nations.

Energy diplomacy is the interaction between two or more countries interconnected by various power-production or consumption sectors, including one or more components of trade, services, investment, technology and energy transmission. 

This kind of diplomacy deepens informal links, improves relations between countries and global engagement, and, in addition to economic and technological dimensions, can also address political and security dimensions.

Iran-Saudi competition 

Iran and Saudi Arabia, two regional rival powers in the Middle East with huge oil and gas reserves, compete on a variety of issues; however, the main confrontation between Tehran and Riyadh is on one matter: each wants to be the superior political actor in the Middle East. 

Tehran and Riyadh have faced off in geopolitical confrontations in the region for decades, including the recent wars in Syria, Iraq and Yemen, and over the presence of IS in the Middle East. The competing strategies have centred on weakening their rivals’ standing and stabilise their own position, investing in creating domestic and foreign political pressure on the rival country.

US sanctions

Iran’s largest export destination is primarily China, followed by the European Union, India and Turkey. In 2017, China imported an average of 700,000 barrels per day from Iran. China’s growing economy is dependent on oil imports – and focusing on energy sources is the primary objective of China’s National Energy Policy.

Between April and August 2018 India imported 658,000 barrels of oil per day from Iran


Before the US sanctions on Iran, Chinese companies were actively present in Tehran’s energy industry. Iran, meanwhile, had considerable involvement in China’s energy sector through providing reliable energy for rapid economic growth. As the partnership deepened, the Chinese firms strengthened their role as an influential actor in the Middle East energy market. 
India is Iran’s second-largest oil customer. Between April and August 2018 India imported 658,000 barrels of oil per day from Iran. India is also interested in getting more involved in Iran’s oil and gas exploitation and infrastructure projects.

Saudi investments

During a recent trip to Pakistan, which met with widespread praise from compliant Pakistani officials, Saudi Crown Prince Mohammed bin Salman announced Saudi Arabia’s willingness to “help” its economy. 

Saudi oil minister Khalid Faleh said he would invest $10 billion in oil refineries in the Gwadar Port on the Indian Ocean. Direct investment in Pakistan has declined by 17 percent in recent years, and the efforts of the Islamabad government to create interest among foreign investors in a direct presence in Pakistan have not had much effect. 

Foreign direct investment in Pakistan over the past seven months has fallen by $30 million compared with the same period last year. Pakistan’s economic situation gives Saudi Arabia an opportunity to influence Pakistani foreign policy and its relations with neighbours.

In 2014, Pakistan signed an agreement with Iran to import natural gas from the Islamic republic. But due to its financial problems, Pakistan is unable to construct a pipeline to import gas from Iran. India and Pakistan signed the TAPI project with the aim of importing natural gas from Turkmenistan. Saudi Arabia also showed interest in providing financial support for the TAPI project. 

All developments in the region show Riyadh is interested in playing a role in regional energy diplomacy and geopolitics.

Saudi Arabia has an active involvement in the Indian energy market and will use its investments to influence India’s foreign policy and reduce Iran’s role in the Indian energy market. In early 2018, Saudi Aramco held 50 percent of Indian refinery shares, with a value of $44 billion, and capacity to refine 60 million tons of crude oil a month. 

India is a major oil customers of both Iran and Saudi Arabia, and the two countries are working hard to get more from India’s energy market. Saudi Arabia has been planning a massive surge into south Asia, and has allocated cash from its $500 billion foreign investment fund to India. 

Aramco set up a new office in New Delhi to oversee its participation in the Indian energy market, and last year India invited Saudi Arabia to participate in the Strategic Reserves programme.

During MBS’ recent trip to New Delhi, his first official visit to India, it was announced Saudi Arabia would invest $100 billion in India over the next two years. Based on a $44 billion investment last year in the petrochemical sector, the $100 billion reported may not be far off reality. 

Could Saudi investments in Pakistan’s Gwadar port be a threat to Indian investment in the Chabahar port in the coming years?

China has major projects such as the one road belt and the sea silk route, which will increase the role of China in regional and global markets. The new Silk Road plan is designed to invest in the infrastructure of more than 60 countries and the development of two commercial routes, the Silk Road Belt and the Silk Road of the Sea, which were presented by China in 2013.

The construction of the oil pipeline from Gwadar to China will reduce the delivery time of oil from the current 40 days to just one week



By becoming a crucial point on the route, Gwadar will become an industrial hub for the region, easily accessible to Central Asia, Afghanistan, the Middle East and Africa. 

Saudi Arabia also has geopolitical considerations in Gwadar. The construction of the oil pipeline from Gwadar to China will reduce the delivery time of oil from the current 40 days to just one week, and Saudi Arabia, like most other oil suppliers, is investing in oil and gas companies in the long term for oil refineries and petrochemicals.

When bin Salman visited China, the leaders of both countries emphasised the need to develop bilateral relations and signed no fewer than 35 economic cooperation agreements worth a total of $28 billion at a joint investment forum. 

Saudi Arabia’s Aramco, the world’s largest oil exporter, will sign a memorandum of understanding with China’s Norinko Corporation to build a refinery and petrochemical project in Panjin, northeast China. Aramco also plans to raise the minimum stock in Zhejiang’s petrochemicals. Zhejiang’s petrochemicals division is building a refinery and petrochemical complex in the eastern province of Zhejiang. 

These investments help Saudi Arabia regain its position as the world’s primary oil exporter to China. Saudi Arabia is also strengthening its market position by signing oil supply contracts with non-governmental Chinese refineries. Riyadh also wants to play an important role in China’s One Road One Belt project.

Saudi investment in the Pakistan, India and China energy sectors gives an opportunity to play a key role in these countries’ energy security. Riyadh will be able to increase oil exports to these countries, while an Iran under sanctions will be unable to play an important role. 

If the US doesn’t extend its waiver to major Iran oil buyers, it is likely that Iran’s biggest customers – mainly China and India – will look to Saudi Arabia.

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Iran’s Petrochemical Industry During the Sanctions Era

The sanctions against the Iranian energy industry since the Iranian revolution not only reduced Iran’s oil and gas production capacity but also made Iran unable to use its potential in the petrochemical industry. Due to sanctions, Iran could not play an important role in the petrochemical market. The use of massive gas resources as cheap feedstock is one of Iran’s best potential methods for producing low-cost petrochemical products. The use of huge Iranian gas resources and the conversion of these capacities to petrochemicals is an important alternative to prevent raw materials and cheap energy sources, although it is not easy to use all existing petrochemical capacities in the context of the recent U.S. sanctions against Iran.

Utilizing the potential of petrochemicals will allow Iran to increase its non-food exports and consequently increase its government currency resources. The value of this industry is estimated to be between $14 billion to $16 billion, which is expected to increase to $50 billion if the sixth plan is fully realized.

In the vision of Iran’s 20-year development plan, the petrochemical industry should become the first-generation power sector in terms of the value of petrochemicals, and the production capacity of petrochemicals will reach $180 million by 2025. Another important objective outlined in the outlook document is to replace the export of oil, gas and petrochemicals instead of exporting crude oil and natural gas, and supporting and strengthening the production chain. Given that according to law, the government is not allowed to invest in petrochemical projects, it must prepare the conditions for the more active participation of the private sector in this field.

Selling products as petrochemicals is another problem in the sanctions period, as foreign partners in petrochemicals will be struggling to work with Iran because they are afraid of U.S. sanctions against their companies, and, of course, production and sales in the petrochemical sector. It will be difficult to imagine the sale stage, if left behind, the import of currency to the country itself has problems, and with this, naturally, the money in petrochemical will remain in the accounts of foreigners. This money should be pumped into petrochemicals at the time of sanctions to cover current costs, such as purchasing feeds that are essential for production.

Studies show that, despite positive measures and significant achievements in the country’s petrochemical industry, there are still weak points that need to be considered and addressed to achieve the desired goals of the documents and laws related to this industry. Policies and laws related to the petrochemical industry of the country emphasize the role of this industry in increasing the value of the oil and gas industry chain, counteracting the vulnerability of oil and gas exports, and the production and export of final petrochemical products.

The Downside

According to forecasts, to reach the target at the end of the sixth program, the value chain of downstream industries and the production of high added value products in the petrochemical industry should be formed. But, as was expected, the new sanctions imposed by the new U.S. led to the industry’s decline. Companies with high technology and modern technology, as well as with adequate financial resources, did not want to invest in Iran’s petrochemical industry. One of Iran’s policies to find a bigger share in the world’s petrochemicals market is diversification into the creation of products that will enable Iran to operate in multiple markets and have a more active presence. The development of petrochemical downstream industries will prevent the value chain from completing with crude oil.

After the Joint Comprehensive Plan of Action (JCPOA), Iran hoped to attract more than $100 billion of foreign capital to restore and increase its oil and gas production capacity as well as increase the capacity of producing petrochemicals. Given that some of the active units of the petrochemical industry of Iran are 40 years old and the renovation of these units was among the priorities of Iran, Iran failed to absorb the capital and technology needed to modernize these units. Iranian companies have good potential in the field of petrochemical, but the main problem is the use of rival companies such as the subsidiary of the tactics and foreign capital.

Sabic Saudi Arabia, the largest Middle Eastern petrochemical company and one of the five largest petrochemical companies in the world, also has the necessary support from the Saudi government, and with the

use of advanced technology from American companies active in Saudi petrochemicals, it has been able to keep its share in the regional and global market. While the company is deprived of huge gas resources such as Iran, the use of the latest technology from foreign companies and the newness of its petrochemical plant has made it possible for the country to sell petrochemicals at cheap prices.

During the last sanctions, petrochemical companies faced two major problems: First, exports of petrochemical products decreased significantly, and second, due to financial and banking sanctions and Iran’s lack of use of the Swift system, petrochemical companies could not export their goods to Iran, and they needed to them to provide part of the export currency to the importers of goods. Today’s petrochemical companies are facing a lot of problems, with feed and supply rates being one of the key and significant issues. On the other hand, petrochemicals have not been able to capture the satisfaction of domestic customers – downstream industries. The price of gas feed in the past year was more than 300 percent. Additionally, the price of various types of services increased from 50 to 300 percent. As a result, the price of gas feed to petrochemical units in Iran is more expensive than all countries of the Persian Gulf. In petrochemicals in this area the main competitor is Iranian petrochemicals. Iran’s petrochemical industry, due to its vast resources of energy and access to adequate and cheap fuel, has quickaccess to global and regional markets, and there is potential for Iran’s petrochemicals to be widespread among foreign investors.

Inadequate Supply

In recent years, most petrochemicals have not been able to capture the satisfaction of the domestic customers, that is, downstream industries. These factors, along with the impact of sanctions, will make it hard to work for petrochemicals. With the high consumption of natural gas in Iran and the lack of attracting foreign capital in the Iranian oil and gas industry, Iran will not be able to achieve its goals of increasing the production of petrochemical products. The withdrawal of Total and CNPC from Phase 11 of South Pars showed that as long as the sanctions are in place, large companies in the energy industry of Iran will not be able to function and Iran will have to use the capital and technology of domestic companies. But how Iranian companies with limited capital and technology can meet Iran’s petrochemical needs is a question. The burnout of major petrochemical units is also an issue that should be addressed by the authorities of the Ministry of Petroleum. The dumping of Saudi petrochemical products in the petrochemical market is another problem for Iran’s petrochemical industry.

In the opinion of the petrochemical industry, it is necessary to open new markets for Iranian products at any cost. Due to the high level of production of petrochemical products and its diversified and low prices, Iran can bring important markets around the world, provided it does not go to producers with domestic laws and regulations.

Exports to EU Market

Iran exported $2.5 billion in petrochemical products to the EU market in the years prior to the last sanctions, but this became a problem with the start of sanctions and hence almost stopped. After the signing of the agreement, Iran’s exports to European countries were resumed and, on the other hand, facilitating the import of needed technology and catalysts into the country in the event of bank transfers going on normally. Petrochemical experts say past concerns in the field of petrochemicals have now fallen sharply, and even if America puts Europe out of reach, we are not worried about the situation.

Analysts believe that in the past, all financial transactions between Iran and other countries had been difficult and practically disrupted the trading system of the country, and petrochemical companies were unable to export their products to the country due to these sanctions. At that time, exporting companies could not enter their currency and provide it to importers or use it to purchase the equipment they needed.

In general, it should be noted that sanctions on Iran’s petrochemical industry included four main sectors: Sanctions on the export of products, sanctions on petrochemical products exports, technological sanctions and technical knowledge, and, finally, sanctions on the petrochemical industries. Of course, the United States has nothing to do with Iran in any of these areas, but the main concern is the sanctions imposed on European and Asian companies.

dailysabah.com

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MBS in China, Saudi Arabia’s new shift to Asia

The political and economic developments in the Middle East region are always at the forefront of the great world powers, and each power, using the leverage of political relations and investment, seeks to increase its presence and influence in the region using infrastructure projects to reduce the presence of competitors in this strategic region.

Major powers are always willing to have energy supplies from oil and gas producing countries, or if they can achieve it, they will prevent the control of energy sources and the routes of energy transit by rival powers.

China is now, and in the face of increasing economic growth since the 1980s, seeking to play an important role in global developments. The Middle East is one of the areas where Chinese politicians have been keen to import a significant part of the demand for oil from the Middle East. In order to increase its role, China has major projects such as the “One Belt, One Road” (OBOR) plan, which will increase the role of China in the regional and global balance of power. The new Silk Road plan is designed to invest in the infrastructure of more than 60 countries and the development of two commercial routes, the Silk Road Belt and the Silk Road of the Sea, which were presented by China in 2013.

Iran and Saudi Arabia as two main members of the Organization of Petroleum Exporting Countries (OPEC) have always had a special place in China’s foreign policy. China has paid special attention to Iran and Saudi Arabia in the road and belt project. During Saudi Crown Prince Mohammed bin Salman’s (MBS) recent visit to China, officials of the two countries emphasized strengthening relations between the two countries, strengthening the linkage between the two countries’ development strategies, increasing the level of cooperation in the design of the OBOR and noted the willingness of the two countries to adopt a common policy on regional and global issues from other summits.

Before MBS’s visit to China, Iranian Foreign Minister Javad Zarif, along with Iran’s Minister of Petroleum Bijan Namdar Zanganeh and their Parliamentary Speaker Ali Larijani, went to China. Zarif wrote about the visit of the Iranian delegation to China on Twitter, which was the main topic of the talks between the two countries, as “Iran’s role in creating a new silk road, as well as continued political, security and economic cooperation.”

 

During the visit, Zarif and Zanganeh discussed the future of China’s investment in South Pars Phase 11 as well as the continuation of China’s oil imports from Iran. The China National Petroleum Corporation’s (CNPC) withdrawal from South Pars has been a major concern for Iranian authorities, since Iran needs foreign capital and technology to increase its gas production capacity.

The framework of Larijani talks with Chinese officials was the political issues of the region and the fight against terrorism. During this trip, Chinese President Xi Jinping supported the “constructive role of Iran in maintaining peace and stability” in the Middle East and announced Beijing’s readiness to build close ties with Tehran on regional issues. The potential for cooperation between the two countries is high, but at present, the volume of trade between the two countries has fluctuated in recent years from $30 billion to $50 billion. The increase in trade between the two countries has been one of the issues raised by the two countries.

 

Tehran-Beijing Ties

 

The Chinese authorities assured Iran that MBS’s visit to China would not have any effect on Iran-China relations. Maintaining a balance in China’s relations with Iran and Saudi Arabia is of particular importance to Chinese politicians, because its energy security depends to a large extent on the oil coming from these two countries. Another important point is Iran’s influence on Shiite believers and Shiite groups in the region and the influence of Saudi Arabia on the Sunni block of the region has been, and remains, a concern of the Chinese government.

The policy pursued by the Chinese government against the Uighur minority should be arguably Saudi Arabia’s objection. Last week, the Turkish Foreign Ministry spoke of the Turkish government’s formal and strong stance on the Chinese government’s detention camps for the Uighur minority. It should be noted that while China has over 1 million people from the Uighur Muslim minority held in forced labor camps, the preservation of good relations between Riyadh and Beijing and the quest for a greater presence in the Chinese energy market seems to have been more of a concern for the Saudi government. Because of this, it has been silent about China’s policy towards the Uighur Muslim minority.

 

Joining Riyadh’s Program

 

During the visit, MBS called for China to participate in the 2030 Arabian program. Saudi Arabia’s 2030 program focuses more on renewable energy and reduces its dependence on oil exports. Saudi Arabia is leveraging investment to reduce Iran’s role as its competitor. They have been using the energy market in India, and if they want to do so, will not lose sight of this leverage to reduce China’s oil imports from Iran. Although Iran can also maintain its share in the Chinese oil market by offering special discounts to Chinese customers and also insurance on Iranian oil tankers. In previous years, Saudi Arabia has been demanding a boost to its European market by offering a discount to some Iranian oil customers. The competition between Iran and Saudi Arabia in the market for China’s energy will surely be in the interest of China and bring the country the necessary oil under convenient and affordable conditions.

 

Ready to Buy

 

Saudi cartels have always been a favorite of Saudi officials. Saudi officials are ready to buy Chinese drills, Saudi Arabia’s consumer market is a good destination for luxury goods and expensive Chinese companies, and Chinese companies want a more active presence in all commercial and infrastructure sectors of the country. Project 2030 presents an opportunity; it’s a good place for Chinese companies, because Saudi Arabia’s shadow boom does not threaten them. The U.S. sanctions have, despite the potential of all industrial sectors in Iran, prevented Chinese companies from investing in the current situation in Iran. As expected, Saudi Arabia and China signed a $10 billion energy deal during the crown prince’s visit. Under this contract, the Aramco State Oil Company and China’s Norinko Corporation have signed a $10 billion contract to build a refinery and a petrochemical complex in the city of Punjin in northeastern China.

 

After the killing of Jamal Khashoggi and Saudi Arabia’s isolation internationally, MBS’s travels to four Asian countries can signal the importance of Asia in its new foreign policy. Iranian and Saudi officials traveling simultaneously to Beijing indicates that Iran and Saudi Arabia are calling for China’s support in regional and global equations. Given the tensions in relations between Iran and Saudi Arabia in recent years, China can also serve as a mediator for the normalization of relations between Iran and Saudi Arabia.

 

www.dailysabah.com

 

 

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Iran-Gulf Energy Relations in the Time of Trump Sanctions

Analysis: Iran could easily export cheap gas to GCC nations, but only if it improves political relations with arch-enemy Saudi Arabia,

Over the past two years, Iran has bolstered its relations with several Arab countries as the Gulf crisis has deepened.

While the Gulf Cooperation Council [GCC] has in the past tried to present a unified, timely and relevant response to regional developments, these attempts are sometimes individualised by the actions of a member nation.

Iran’s relationship with every member of the GCC is different. Oman, the closest country to Iran among GCC members, maintains its warm political relationship with Tehran in a relatively predictable direction.

Iran-Oman relations faced few challenges either before or after the 1979 revolution. Oman’s policy of establishing close and positive relations with Iran, and a constant emphasis on the development of relations in all political, economic and cultural fields, has led Tehran and Muscat to recognise each other as strategic partners in the Middle East.

Oman also played a mediation role in Iran’s nuclear talks with the P5+1 countries and hosted several rounds of dialogue between Iranian and US foreign ministers.

Tensions between Iran and Saudi Arabia, meanwhile, have built steadily during the Hassan Rouhani era. They have mutually exclusive interests in Syria, Iraq and Yemen. The attack on Saudi diplomatic sites in Tehran and Mashhad also enflamed tensions more than ever.

In Iraq, since the fall of Saddam, Iran’s influence has grown significantly. Along with Iran’s allies in Lebanon, Syria and Yemen, Tehran’s regional expansionism has grown and alarmed Riyadh, which is fearful that growing Iranian influence comes at the expense of its own regional power.

Saudi Arabia has used the current tranche of US sanctions against Iran to produce more oil and take Tehran’s share of the world market. Riyadh is also trying to use its investments in major buyers of Iranian oil, such as India, to persuade them to reduce Iran’s role in their energy markets.

The GCC has always viewed the Islamic Republic of Iran as a fundamental threat to its existence, and from the outset, has taken a hostile attitude towards Iran.

Meanwhile, facing the collapse of the nuclear deal and the new sanctions, Iranian officials have declared they are “ready and interested” to develop bilateral relations with Iran’s neighbours, mainly the GCC.

 

Leveraging energy resources 

Iran’s geopolitical importance is in no small way connected to the existence of huge energy reserves, drawing the attention of global powers to the region. This, along with the strategies of other regional and global powers, largely shapes the foreign policy of the Islamic Republic.

Iran’s main objective is to promote its regional status – and the biggest obstacle to achieving this is the strong US military presence in the region.

Regionalism as a main factor in Iranian foreign policy gives an opportunity for Iran to expand relations with the GCC. Iran, with huge oil and gas reserves, can be an energy supplier (mainly of natural gas) to some GCC members such as Oman, the UAE and Kuwait.

Given the fact that the Gulf countries are Iran’s top priority for gas exports, after negotiations with Oman, there is now the possibility of adding Kuwait to Iran’s list of gas customers.

Ali Reza Kamali, the former CEO of Iran’s Gas Export Company, said the current survey of Iran’s first gas exports showed it would only require the construction of a 200 kilometre pipeline to reach the markets of Oman, Kuwait, the UAE, Saudi Arabia, Bahrain and Iraq.

While in recent years these countries have been believed to have little need for oil imports, they have little in the way of gas – except for from Iran.

If Iran does increase its gas production capacity, there is a possibility of export to the Gulf. Although initial talks for Iranian gas exports to Kuwait have not yet been finalised, the operation of the Iranian gas pipeline to Iraq could provide the foundations for the necessary physical infrastructure to provide gas onwards to Kuwait.

This means the technology and personnel to export gas through Iraq to Kuwait is largely already in place, and this programme could become operational not long after a contract is signed.

Although countries such as Iraq, Saudi Arabia, Kuwait and the UAE do have gas resources, these consist mainly of gas with oil, and they do not have independent gas reserves. These countries are also focused on oil production.

Hamidreza Aragi, the director of Iran’s National Gas Company said that if gas contracts between Iran and neighbouring countries were signed, the security of the countries of the region would be tightly linked.

In terms of economics, politics, population, history of the formation and influence of Saudi Arabia in the Arab world, Saudi Arabia has long sought to expand its influence within the GCC as its most important member.

To enter a new era in Iran’s relations with the Council, both sides would need to be able to shift their concerns towards tangible diplomatic achievements. Iran has also to be more active in foreign diplomacy in order to eliminate problems with its neighbours.

 

To enter a new era in Iran’s relations with the Council, both sides would need ti  be able to shift their concerns towards tangible diplomatic achievements

 

Iran still has huge potential in the petrochemical sector, and exporting more petrochemicals may provide an alternative to exporting LNG while oversupply lowers the value of the LNG market.

Recent political tensions in the region have affected natural gas agreements with Iran’s neighbours, with energy experts believing political tensions between Iran and Saudi Arabia have an overall negative effect on Iran’s ability to conduct business over natural gas agreements with other Arab nations.

Iran enjoys good political and economic relations with Oman; however, foreign factors have delayed the project of Iranian-Omani natural gas pipeline at the planning phase.

Iran should try to reduce tensions with Saudi Arabia to a manageable level, as the relations between Iran and the Gulf Cooperation Council depend on Iran’s relations with Riyadh.

History has shown that ties between the Gulf Cooperation Council and Iran have improved as relations between Iran and Saudi Arabia improve.

/www.alaraby.co.uk

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What do Middle East Energy Markets Hold in Store for 2019?

 

In 2018, the oil market showed great instability, with no apparent balance between supply and demand.

One of the main factors influencing oil prices may be regional political developments, given that the Middle East supplies 70 percent of the world’s oil. In 2018, geopolitical tensions, financial developments, and supply-and-demand triggered a change in the price of oil on the global market, while US President Donald Trump’s tweets also sparked a tense atmosphere.

 

But 2019 is expected to see further fluctuations in the oil market. In recent months, OPEC members have not been able to reach lasting agreement, despite long days of talks, so let’s take a look at the economic situation of major producers – Saudi Arabia, Iran and Iraq.

The latest IMF report explores the developments in the oil market, saying that the economic outlook for oil-exporting countries is largely dependent on the “uncertain future” of oil prices.

The United States has meanwhile unilaterally imposed sanctions on Iran and predicted such measures would “potentially reduce Iranian oil production and exports dramatically for at least the next two years”.

The IMF predicts oil prices will continue to rise to $60 a barrel by 2023. The Organization of Petroleum Exporting Countries (OPEC) and its allies, which account for 55 percent of world oil production, have faced a challenge in their role stabilising the oil market. Saudi Arabia, which has a significant surplus capacity, could not implement the necessary production reductions to maintain oil prices at $70 per barrel.

 

Most OPEC members benefit from oil prices between $70 and $90 – enough to cover domestic budgets, but not so high as to drive investment in alternative fuel sources and technologies, especially renewable energy and electric vehicles.

 

What will happen in Middle East energy markets in 2019? What affect will any price rise/fall have on ordinary people and on regimes?


Iran

One of Tehran’s principal development goals is to achieve a production capacity of 5.7 million barrels of crude oil and gas liquids per day, with a production capacity of more than one billion and 300 million cubic metres of natural gas per day.

 

Exports of Iranian crude oil and gas condensate in the past round of sanctions under the former US administration dropped by about 1.2 million barrels per day over two years, but this did not have a significant impact on oil prices, as the world was facing a surplus of oil supplies between 2014 and 2016.

One of the most important factors in pricing is the state of market equilibrium in terms of the possibility of substituting oil from the market due to sanctions, oil prices and geopolitical factors. Since the reintroduction of US sanctions, Iran’s oil exports have fallen.

Although the export figures for Iranian oil are not officially announced, according to estimates from various sources, during the months of August and September 2018 Iran’s export of crude oil and gas condensates declined between 300 and 600 thousand barrels per day. According to estimates from secondary sources, in the same time, Iran’s crude oil production fell by about 450,000 barrels per day.

 

The US government initially announced that it would attempt to reduce Iran’s oil exports to zero by November 4, 2018, but eventually it was forced to exempt eight countries that imported oil from Iran.

However, there is likely to be a market surplus this year, and Iran’s oil exports will certainly be affected. But, if oil prices continue to decline, the likelihood of a drop in supply from OPEC and non-OPEC producers is high.

 

Iran under sanctions is unable to play an important role in the global oil market and cannot produce or export more oil.

Any increase in the oil price is therefore in favour of Iran. Iran had been producing about 2.5 mbpd in recent months but was expected to drop to about 1 mbpd when January 2019 figures are more fully estimated.

By October 2018, Iran had begun to sell oil in energy exchanges within the private sector to sell more on the regional market. But energy exchanges have not been as successful as expected, and Iranian oil exports will not increase. Since domestic production is in short supply, the export of goods is not affected by the exchange rate – which has a more visible and noticeable effect on Iran’s imports, as all four of Iran’s main economic sectors, agriculture, industry, oil and services, import capital goods, and intermediaries are dependent on the outside world – so rising oil prices can lead to lower prices for domestic products, or falling oil prices lead to higher prices for domestic products.

 

Saudi Arabia



For decades, Saudi Arabia has traditionally played the role of swing producer in the oil market; a producer with enough spare capacity that can quickly change its oil production at no extra cost. But for a long time, Saudi Arabia has not played such a role: the rise in US oil production, along with a host of other factors, has led to a surplus of demand for the oil market, and as a result, oil prices have fallen.

OPEC’s expectation was to cut oil production to increase prices. At OPEC’s annual meetings, Iran, and most OPEC countries, made the same request, while Saudi Arabia and its allies offered another target that was not so wrong: protecting market share.

In October 2014, Saudi Arabia took a different policy towards the oil market and refused to reduce its crude oil production in line with maintaining oil prices, which initially caused great damage to the country’s economy.

 

Saudi Arabia has spent billions of dollars of its own money in order to maintain its share in the global oil market, as well as to force OPEC member and non-member countries to reduce oil production. Speculation about the fall of oil was ripe during this period: Did Saudi Arabia target Iran and Russia, or plan to reduce oil production from unconventional shale, or was there some other story?


Iraq

The proposed $111.9 billion budget, sent to the Iraqi parliament in October, estimated the export of crude oil at 3.8 million barrels per day at $56 per barrel. The proposed budget will increase spending by 23 percent and a deficit of $ 22.8 billion.

This budget will not cover the country’s reconstruction after many years of war, with about 1.8 million people still yet to return to their homes. Part of Mosul, Iraq’s second city, has been destroyed, like many other cities and villages that were in the hands of IS.

 

The Iraqi Ministry of Planning estimates that the country needs about $88 billion to rebuild. In February 2018, donors at the Kuwait Summit promised $30 billion in loans and investment assistance to fund a portion of this budget, but little progress was made. Meanwhile, protests, unemployment and public service disruption have plagued , the southern resource-rich region in recent months.

The interruption of electricity is also a national problem in Iraq and in the south, drinking water is unclean.

The Iraqis chose their new government in early 2018, but the government is influenced by political factions similar to those that have run the country over the past 15 years. Legislators have rejected the draft budget and are demanding a new budget based on an estimate of the level of oil price closure, and more allocated funding for public investment.

While global attention is focused on the destruction caused the wars in northern and western Iraq and protests in the south, the budget crisis is also a major concern for Iraqis living in more stable regions.

 

Half-finished construction projects have remained at a standstill all over Baghdad for years. But after the government declared war on IS, the general budget fell. When oil prices recovered in 2017, the government began to pay instalments on construction mega-projects, but only for those that were mostly completed.

Payments are once again waiting for the outcome of budgetary negotiations. The attempt to diversify the economy has been halted by the rise of domestic political conflicts and corruption, as well as war and instability.

“Our destiny depends on oil. When the [price] goes down, our blood pressure will rise,” said one Iraqi analyst.

During the most recent period of sanctions, Kirkuk oil – along with Russian oil – became an alternative to Iranian oil because of a similar chemical profile. In 2019, Kirkuk oil’s share in Iraq oil exports is likely to increase – and this will not be good news for Iran.

As the global oil market simultaneously sees an increase in Russian, American and Saudi oil production, as well as the maintenance of the quota of Iranian oil with a slight decrease in the market, the world’s oil production rate has  surpassed demand and has become one of the factors behind the fall in commodity prices.
Major oil producers will be hit by declining prices because most of the revenue of these nations comes from oil. Iran under sanctions will unable to sell more, but if prices are to rise, Iran’s damaged economy would stand to benefit.

The US decision to grant exemptions to some of Iran’s oil buyers changed the market dynamics that were already under pressure from three major manufacturers: the US, Russia and Saudi Arabia.

Non-OPEC oil production could yet increase from 1.5 to 2.2 million barrels per day in 2019, with shale being behind the rise. The sharp rise in US production will be a major hindrance to rising oil prices in 2019.

Oil demand will grow between 0.9 and 1.5 million barrels per day in 2019. This figure was between 1.1 to 1.5 million barrels per day in November’s poll. In terms of demand, the main factor is the question of how far economic growth will slow in 2019 and how much lower the demand for oil will be in the coming year.
The IMF expects to see oil prices rising in 2019, which could improve the economic conditions of the Gulf states. Given the trade and economic constraints with Tehran, the economies of Iran’s neighbours will not be subject to a re-imposition of sanctions. Oil-related sanctions against Iran do not make good business sense for foreign companies looking to make investments, and this will make the economic situation worse for Iran.

The worrying global economic downturn has furthered the negative impact of a surplus supply. China’s and India’s oil imports have not yet been enough to offset consumption in other developing countries.

Although the shale gas revolution has serious potential for increased production, and Russia has voluntarily reduced its quota over the past few years by cooperating with OPEC, now Moscow is also seeking to increase production.

 

However, Saudi Arabia, as the third actor in the triangle of production increases, can not, in the long run, increase production beyond its capacity, because its ability to produce a glut of oil is dependent on the Iranian oil industry failing.

Perhaps Moscow and Washington could make headway in this situation for a while, but in Riyadh that potential is basically absent. Of course, it also should be noted that although the global oil market is likely to contract as prices fall, Moscow also must slow its domestic revenues to increase its income – but this cannot be predicted within a specific time frame.

 

www.alaraby.co.uk/

 

 

 

 

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Challenges and Opportunities for Saudi Arabia’s Energy Transition from Oil

Currently, the main source of Saudi revenues is oil production—at a rate of nine to ten million barrels per day. Yet, this is not the kingdom’s only resource: Saudi Arabia is actively engaged in implementing many industrial projects, including energy projects and projects based around crude oil, in an effort to diversify its economy and wean itself off of dependence on oil.

 

Saudi oil resources and oil policies play a primary role in the kingdom’s dealings with the outside world. Yet in light of recent international outrage over various Saudi abuses and atrocities, such as the killing of journalist Jamal Khashoggi, the country is focusing more and more on plans for diversification under Vision 2030.

Oil prices will continue to play a significant role in Saudi Arabia’s economy, but whether Saudi Arabia can maintain oil prices to provide a steady stream of income, is a matter that must be coordinated with OPEC, of which it is a powerful member state. Success in this arena will require coordination among the ruling Saudi government, the U.S., and the other major oil powers.

According to reports, the U.S. has announced that it will be able to supply 80 percent of the world’s oil demand through its own shale oil supplies within the next three years. While this may be exaggerated, the U.S. seems intent on keeping oil prices at a level of at least $55 to $60 per barrel over the next three years. At this price, Saudi Arabia can be confident over the next few years of a steady income stream from oil.

Saudi Minister of Energy, Khalid Al-Falih, has announced that there will be no change in Saudi oil policy. Riyadh’s goal is to keep its share of the market in oil, and it expects to earn at least $2 trillion in sales of up to 5 percent of Aramco stock, although in August 2018, Saudi Arabia postponed the much anticipated initial public offering. Nevertheless, Al-Falih has promised to bring this amount into the global industry, and the proceeds from the Aramco sale and the resulting business will be transferred to Saudi Arabia’s Public Investment Fund (PIF).

 

The PIF Program (2018-2020) is one of twelve Saudi “vision realization” programs. The program outlines Saudi objectives in local and international investments that will enable the diversification of the kingdom’s sources of development and growth. In total, with other revenues injected into the fund, it is expected to reach $3 trillion. The minister hopes that other industries will also be motivated to grow.

Saudi Arabia’s 2030 plan is an opportunity to reduce the kingdom’s dependence on oil. Crown Prince Mohammed bin Salman has strongly criticized decades of the Saudi addiction to oil – blaming it for the kingdom’s recession.  The sale of a small part of Aramco, the world’s largest oil company, will create the world’s largest investment support fund intended to operate in a wide range of capital markets, create more employment for women, and focus more on the dynamics of non-oil industries from mining to military hardware.

These goals are very radical in a country where 90 percent of the government’s revenues come from oil, and whose budget deficit has reached 13.5 percent of GDP since the fall in oil prices in 2016. The crown prince claims that the country can develop trade, investment, and foreign tourism to bring its non-oil revenues up to $600 billion by 2020.

Renewable Energy

 

At present, Saudi Arabia’s domestic consumption is fully dependent on hydrocarbon fuels, which accounts for a quarter of its oil and natural gas production. The government hopes to supply more oil and gas to lucrative foreign markets by replacing its reliance on it with atomic energy and renewable resources. The Saudi government plans to develop 30 solar and wind power plants over the next ten years. The plans will be part of a major $50 billion expansion plan for renewable energy to reduce dependence on oil by 2030.

Saudi Arabia is preparing itself to provide around 30 percent of its electricity needs over the next 20 years from its largest potential source of energy – solar power. It has one of the world’s highest levels of solar radiation and targets installing photovoltaic capacity of more than 41 gigawatts of electricity by 2032. To do this, Saudi Arabia has been counting on China’s help as a leading developer.

Riyadh hopes that in the decades ahead, it will contribute more to reducing its fossil fuel consumption to export markets, but the Saudi Energy Research Center has acknowledged that hydrocarbons will still have a major contribution to the energy basket by 2032 and beyond. The projections of the energy mix until then include 60 gigawatts (GW) of hydrocarbon fuels, 41 GW of solar energy, 17.6 GW of nuclear power, 9 GW of wind power, 3 GW of waste to energy, and 1 GW of electricity generated by geothermal energy.

Wind

Saudi Arabia has high potential for wind around the Red Sea and southeast of the country. Four large consortiums have signed contracts worth $500 million to build the first Saudi wind power plant. The contract is based on a 20-year Power Supply—Power Purchase Contract, signed by Saudi Power Company. The plant is expected to supply 70,000 Saudi Arabian households. In addition, based on Saudi Arabia’s 2030 vision, American company General Electric will launch a pilot project for a 2.75-megawatt wind turbine for Saudi Arabia, expected to replace diesel fuel from one of Aramco’s refinery complexes.

Experts believe the wind industry in Saudi Arabia is an important step in the country’s energy resource shift strategy. The first large Saudi-scale wind turbine is actually an important chapter in Saudi Arabia’s efforts to diversify its energy mix. Saudi Arabia’s Aramco Oil Company said it plans to turn the country into a clean and renewable energy hub through the construction and development of a massive wind project.

 

Aramco, Saudi Arabia’s oil giant, recently announced plans to allocate billions of dollars to build and develop a huge project called Spark, which will make Saudi Arabia the largest clean energy hub and facility. According to officials and executives of the company, the project will be completed in 2035, spanning a land area of 50 square kilometers, near the two cities of Dammam and Alhassa.

Experts estimate that the development and operation of this massive project will, directly and indirectly, generate over 100,000 jobs in Saudi Arabia, with positive changes in the infrastructure of industries and sectors.

Given the projected decline in world oil and gas reserves, many analysts have said for almost half a century now that all countries will have to fully utilize clean and renewable energies.

 

$7 Billion in Renewable Energy Projects Expected This Year in Saudi Arabia

Saudi Arabia expects this year to launch several renewable energy projects, especially solar power plants, worth $7 billion. Turki Mohammed al-Shihri, director of the Saudi Renewable Energy Development Project Office, has claimed that bids will be issued for eight projects with a total capacity of 4.125 GW this year. The cost of these projects will be between five and seven billion dollars.

Saudi Arabia and other Middle Eastern oil producers are looking for renewable energy to grow domestic demand so that they can export more oil to receive higher oil revenues. Saudi Arabia is looking to install 9.5 GW of solar and wind capacity by 2023. Manufacturers have lowered their solar pricing offerings in recent years. Saudi projects this year include 3.3 GW of solar photovoltaic and 800 megawatts of wind.

The winners of these bids cover the cost of the tender, while the government guarantees that it will buy electricity from these projects within 25 years. The country plans to connect 3.45 GW of renewable energy by 2020, which includes 700 megawatts (MW) of solar and wind power, which has already been tendered. Saudi Arabia expects to receive the final proposals for a 400 MW wind power plant Northwest of the country by March 20th.

Aramco, Saudi Arabia’s oil giant, recently announced plans to allocate billions of dollars to build and develop a huge project called Spark, which will make Saudi Arabia the largest clean energy hub and facility.

Nuclear Energy

Nuclear energy is relatively costly, and in the long run, nuclear generators accrue significant expenses. In addition, there are the obvious dangers, both security and environmental, of nuclear power plants. Saudi Arabia is likely to follow other countries that typically have one or two nuclear generators, notwithstanding that they are not profitable for Western countries.

Nuclear energy is relatively costly, and in the long run, nuclear generators accrue significant expenses.

 

Saudi Arabia’s 2030 Program for Renewable

Saudi Arabia is moving toward new energy sources by the 2030s, but success depends on whether other resources will be available at affordable prices. Given the huge amount of oil resources available and vast amounts of extracted oil, in the short-term, the Saudis prefer to use these resources and sell their oil as much as possible. But today, there are more urgent needs for energy for making seawater potable and for economic development.

Saudi Arabia is geographically ideal for solar energy, perhaps uniquely so. In fact, this country could produce a lot of clean energy from the sun, but it will likely need countries like Sweden to help it develop clean-running transmission systems.

In Saudi Arabia’s vision, reducing dependence on oil revenues is the country’s most important economic target by 2030.

 

 

Challenges

In Saudi Arabia’s vision, reducing dependence on oil revenues is the country’s most important economic target by 2030. However, oil revenues will continue to be important for Saudi Arabia’s domestic political economy because its efforts in the areas of job creation and social services depend upon the continued inflow of oil revenues in the short-term.

Saudi Arabia will be a serious rival in attracting foreign investment to the countries of the Middle East and North Africa, including Iran, in line with the principles and plans outlined in the 2030 vision plan, and this could spell added tensions in the region.

The principal benefits of the Saudi diversification program, if achieved, are that it would buoy the Saudi economy and decrease the vulnerability of the country to fluctuations in the global oil market.

However, the implementation of this large program is dependent on oil revenues and the ability of the country to procure investment from abroad. Saudi Arabia’s oil marketing strategy, on the other hand, continues to expand investment in the refineries of countries with demand growth potential, especially China.

The consequences of the sale of part of Aramco, one of the first steps in this process, will likely be daunting to policy-makers, and may intensify internal disputes; yet, the sale of stock could be the beginning of a wave that provides a model for other governments with similar challenges in the region.

 

 

 

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Iran and Saudi Arabia Compete for India’s Energy Market

India now has the highest oil and natural gas consumption in the world and will for the foreseeable future. With exorbitant and ever-increasing energy demands, India is under pressure to diversify its energy supply. Iran and Saudi Arabia are now in a race to meet India’s demand in the international oil and gas market.

 

India is the second largest Asian oil consumer after China. In 2017, India was buying 577,000 barrels per day (bpd) of oil from Iran, accounting for 27 percent of Iran’s total crude oil exports. From January to October 2018, India imported 789,000 bpd of oil from Iran, an increase of 36 percent. Iranian officials have offered significant price discounts to India as a strategy to maintain Iran’s share of India’s oil market, and Iran has insured tankers which transport its oil.

 

Saudi Arabia is one of India’s largest oil suppliers, and the second largest supplier of crude oil and liquefied petroleum gas (LPG). In 2016-17, India’s crude oil imports from Saudi Arabia amounted to 18.5 percent of its total imports or 39.5 million tons out of a total of 214 million. From January to October 2018, India imported 697,000 bpd of oil from Saudi Arabia.From Iran’s perspective, India’s investment in multiple sectors of its own domestic market, especially infrastructure and energy, equates to political insurance. India’s investment in Chabahar port is a case in point.

 

In February 2018, during a visit by Hassan Rouhani to New Delhi, India, Iran signed 15 mutual cooperation documents, the majority of which related to oil and gas fields cooperation. After this visit, it was announced that Iran had eliminated the cost of transporting oil to India for the rest of the fiscal year. The decision was made as a response to India reducing its oil imports from Iran between April 2017 and January 2018. The move marked a success for Iranian policy makers, and it was subsequently stated that India would increase its oil imports from Iran.

 

Saudi Investment in India’s Energy Sector

 

Saudi Arabia plays an active role in energy diplomacy in India. Investment in energy infrastructure is an effective way for Saudi Arabia to infiltrate and influence India’s foreign policy decision-making process. Aramco, the world’s largest oil producer, is looking to invest in foreign refineries to meet demand for oil and increase its share of global markets. This is a strategy that will allow Saudi Arabia to expand its share of Asian markets and essentially leave its rivals in the dust. Saudi Arabia is not only competing with Iran politically but aiming to gain an edge over even-more-productive Iraq to become India’s largest oil importer. Last year, Iraq was India’s largest oil importer.

 

In April 2018, Saudi Aramco and India’s Ratnagiri Refinery & Petrochemicals—a joint venture of Indian Oil Corp (IOC.NS), Hindustan Petroleum Corp (HPCL.NS) and Bharat Petroleum Corp (BPCL.NS)—signed a contract worth $44 billion to build a refinery in the state of Maharashtra in western India. The two sides are contributing 50 percent to this project. Saudi Aramco has said the refinery will have a production capacity of 1,200,000 bpd upon completion. Aramco also said the project would be one of the largest refineries of petrochemicals in the world. According to Saudi Energy Minister, Khalid Al-Falih, refining capacity of 60 million tons of crude oil is said to be Saudi Arabia’s only major investment in India. Aramco is also interested in investing in fuel and petrochemical sales as well as oil reserves in India.

 

Saudi Arabia does have the potential to act on this investment promise. Aramco has shipped three million barrels of crude from three refineries in India, and another Indian refinery is currently negotiating with Saudi officials to sign a contract for one million barrels of oil. Political tensions between Iran and Saudi Arabia, especially over the Yemen crisis, but also enflamed by the US’s withdrawal from the Joint Comprehensive Plan of Action, and new sanctions against the Iranian energy sector, have meant that Saudi Arabia is more than capable of seizing the current momentum in its favor to decrease Iran’s role in regional energy markets, especially that of India.

 

Saudi Investment in TAPI Project

 

Afghanistan, Turkmenistan, Pakistan, and India have recently signed multi-billion-dollar investments in the TAPI gas pipeline project. Saudi Arabia has announced it will invest in the construction of a gas pipeline that will transfer Turkmen gas to Pakistan and India through Afghanistan.

 

With the participation of Saudi Arabia in the TAPI energy transfer project, Riyadh, on the one hand, could draw the US’s support for reducing Russian domination of Central Asian energy resources (through increasing export routes around Russia). On the other hand, with this increase in engagement in the Central Asian energy region, it may be possible for Riyadh to gain concessions in future energy talks, especially in the context of global oil policy, to control the global price of energy carriers.

Security concerns and financial resources pose the main obstacles to realizing the TAPI project, yet Saudi Arabia’s support for the project is merely another instrument to circumvent Iranian power and influence. Saudi Arabia is directly investing in India’s energy infrastructure, as well as offering political and economic support for transportation projects which allow access to the Indian market by side-stepping Iran.

 

For India, the American market is thus more attractive. With the US-imposed sanctions in place, Saudi Arabia is likely to become India’s largest oil supplier. At the same time, however, India will greatly increase its imports from Iraq. Even Nigeria has gained access, so insatiable for fuel is India’s current phase of development. Most oil producing countries have increased their exports to India across the board.

 

As expected, the U.S. has granted waivers to major buyers of Iranian oil in India and allowed them to continue imports beyond the U.S. sanctions deadline. It will not be easy for India to find an alternative to Iranian oil, but it does not mean that in the mid-term or long-term it will be impossible for India to figure out some long-standing arrangement. Saudi Arabia and Iraq are poised to make up the bulk of India’s oil needs. Saudi Arabia is more interested in exporting oil to India in order to weakening Iran’s position in its oil market, with the added bonus of making a dent in the Iranian economy.

 

India and China are interested in establishing an “Oil Buyer’s Club,” to increase their bargaining power and reduce the power of the U.S. oil market by also importing crude from the U.S. China and India had previously proposed to buy Iranian oil in exchange for being paid in Yuan and Rupees.

 

Iran’s main issue (among many) is to be available to attract foreign investment when it does have the chance to bypass sanctions, and this requires an accommodating legal framework, an efficient and fast decision process, and political stability (especially in the international context). These variables are far from being achieved, and the country has a long road ahead.

 

Iran and Saudi Arabia Compete for India’s Energy Market

 

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