NewBase 596 special 04 May 2015

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NewBase 04 May 2015 - Issue No. 596 Khaled Al Awadi

NewBase For discussion or further details on the news below you may contact us on +971504822502, Dubai, UAE

Oman’s regulator: Electricity subsidy reform vital Oman Observer + NewBase

Oman’s power sector regulator is warning that the ongoing subsidisation of the electricity sector, at enormous cost to the government and the wider economy, is unsustainable and would need to be reviewed and reformed in the longer term interest of the country. For example, a staggering 85 per cent of residential customers continue to enjoy access to electricity at a paltry 10 baisas per unit introduced at the outset primarily for the benefit of low-income customers. This non-discriminatory nature of electricity subsidy, which confers equal benefits on the well-to-do and less-well-off customers alike, at a time of significant challenges for the sector, needs to be reevaluated, according to a top official of the Authority for Electricity Regulation — Oman. “We are actively advocating the need for a relook of the level and allocation of subsidy provided by the government to the electricity sector due to the current tariff structure,” said Qais bin Saud Al Zakwani, Executive Director. “Of course, the government is the ultimate decision-maker in

this matter, but the Authority will continue to provide all the necessary information and analysis to support any eventual decision on subsidy reform,” he added. Speaking to the Observer in an interview to mark the 10th anniversary of the establishment of the Authority, the Executive Director said a decision on cost reflective tariffs which can be seen as a first step towards tariff reform was in the cards. “The Authority has been talking about the introduction of cost reflective tariffs for a long time, and this issue has gained momentum of late, with a decision on the subject now imminent. This is one mode of removing subsidy from industrial, commercial and government customer groups, and to ensure it is targeted at customers who need it the most.” The Authority, Al Zakwani said, has the informational

wherewithal to assist the Omani government in arriving at judicious decisions in restructuring the subsidy regime. “We have data on every customer group, their demand projections, usage levels, timings of usage and other parameters. On behalf of the government, we can map out different scenarios and sensitivities, and advise the government on the impact on subsidy if it chooses to adopt a specific tariff structure. We could not offer such detailed input back in 2004 when subsidy was provided in an aggregate form to the entire sector, but we have all of the requisite data now to assist in the decision-making.” Looking at other potential challenges looming for the electricity sector going forward, the




Executive Director warned that the issue of escalating electricity demand growth also needs to be suitably tackled. “Demand is growing at 10 – 11 per cent annually, and we just cannot keep building new power plants to meet this growth. We need to work on providing incentives to customers to reduce this demand especially during peak periods of the day. We have not done a lot on energy efficiency – whether it is in the implementation of building codes, advocating the efficient use of appliances, the way people use electricity at home, and so on. All of these issues need to be addressed.”

According to the executive, energy efficient building construction can make a significant contribution in alleviating the surge in electricity demand. “With all of these huge buildings coming up — both in the government and private sectors — if we can work to incentivise them to undertake some energy efficiency measures then it’s a good start. Muscat Municipality, for example, can also consider offering incentives to developers when they apply for building permits, for example, in the use of insulation blocks or energy efficient windows.” Privatisation: Importantly, power sector privatisation — one of the success stories of Oman’s restructured industry — is expected to pick up pace in the coming years, says Al Zakwani. The privatisation of the generation market is well documented and the procurement market will be going through a transition phase. Some generators will still have an asset life, but don’t have an agreement with PWP to sell that power. PWP is developing that structure. It’s a normal transitioning of the market from a procurement perspective. Privatisation, he stresses, is a key route to boosting efficiency, skills development, and the overall modernisation of the sector and was always seen as an objective of the restructuring that happened ten years ago. “We need to see improvement in the overall efficiency of the sector.




Of course, in some areas, we have made considerable improvement. Electricity sector losses, for example, have decreased from 25 per cent in 2004 to under 10 per cent presently. But to go from 10 per cent or 8 per cent, will require a lot of expertise, which we lack in certain areas within the sector. To achieve this, we do need to get international companies to buy into licensees and start ratcheting up standards to international levels. This can happen only through privatisation.”

The Authority, Al Zakwani said, is optimistic that at least one or two government-owned electricity companies will be privatised over the next five years. Initial studies aimed at assessing the economic feasibility of privatising Muscat Electricity Distribution Company (MEDC) are now underway. He said the oversubscription of the 10-year benchmark US dollar bond issue of Oman Electricity Transmission Co (OETC) represented a powerful shot in the arm for the government’s privatisation objectives. With the finance raised via the bond issue, OETC now has the funding resources it needs to expand and modernise its massive network, without having to rely on the government for finance, he noted. Furthermore,

the strength of interest in the bond issue attested to the robust credentials of Oman’s electricity sector and its embrace of best practice regulation, he stated. Energy security: Another major priority for the Authority is energy security, said Al Zakwani. Final submissions on a long-term National Energy Security Strategy 2040 are to be made to the government by a high-level panel of experts. The strategy spells out a diverse portfolio of fuel resources including local gas supplies, renewables and other fuel sources that Oman must access in order to secure its long-term energy needs. Significantly, renewables is a key ingredient in the proposed energy mix. “Once the government approves a quota for renewables in the energy mix, based on the recommendations of the National Energy Security Strategy, we can then ask Oman Power and Water Procurement Company (OPWP) to go out and start procuring renewables-based generation capacity. “We need to move away from a 100 per cent reliance on gas for electricity generation and include an element of renewables in the mix. I believe a decision is imminent.”




Saudi energy sector poised for unprecedented growth Saudi Gazette

The Oil & Gas Year (TOGY) – a series of annual, country-specific energy reports on petroleum provinces worldwide – has appointed Annie Michailidou as the new country director for Saudi Arabia who will lead and oversee the preparation of its third energy report on the country.

Following the success of the 2014 edition, TOGY continues to provide the most comprehensive business intelligence report dedicated to Saudi Arabia’s energy industry. Michailidou and her team of analysts have already conducted high-level meetings with leaders in the country’s oil and gas industry since she arrived in April for the upcoming “The Oil & Gas Year, Saudi Arabia 2015”. Besides, she also has held talks with dozens of representatives from the industry’s foreign delegations. Armed with a good track record, Michailidou is optimistic that though it is her first time in the country, her vast experience will allow her to establish

TOGY’s foothold in the world’s première energy economy. She is enthusiastic to working in the Kingdom knowing that a competitive local oil and gas industry will ensure Saudi Arabia, along with UAE, is one of the top economies in the region in which to do business. Michailidou forecast that the Saudi energy sector – from upstream to downstream – remains of vital importance to the economy, and is poised for unprecedented growth, diversification and profitability. She noted that foreign investment (in the sector) has increased 500 percent over the last 10 years to SR1.05 trillion ($280 billion) at present, underpinned by a $90-billion petrochemicals industry. “The timing of TOGY entering the Saudi Arabian market is apparent at this stage. The decisions made within the oil and gas industry in 2015 complement sound investment decisions in the world’s most important petroleum province with production at 10 million barrels of oil per day – at the vanguard of the Organization of the Petroleum Exporting Countries (OPEC),” she said. She further said that TOGY’s role in Saudi Arabia in 2015, after speaking with the country’s decision-makers, is to provide better understanding through the most comprehensive business intelligence report on why a robust energy industry and its sub-sectors bode well for long-term investment in the country. Eric Gay, TOGY regional director for the GCC, said “as TOGY commences interviews for its 2015 edition, Saudi Arabia's oil production has been near record-high levels. A continued production push from the country will be the backdrop for a high-profile exploration and production chapter in the report.” He observed that Saudi Arabia's production boost is on the lips of most oil and gas executives, and provides an interesting perspective for the 2015 edition. Recently audited by Business Publications Audit of Circulations (BPA) Worldwide, The Oil & Gas Year series’ readership includes 69,000 energy and finance executives in 101 countries together with key government ministries and oil and gas executives in the GCC and globally.




Saudi Sadara enters into 20-year supply accord with Halliburton-TAQA Saudi Gazette + NewBase

SADARA Chemical Company and Energy Chemical Sources Company (ECSC), a newly formed joint venture between Halliburton and TAQA, have signed a long-term supply agreement through which ECSC will purchase product from Sadara to feed a new chemical production facility to be built in PlasChem Park located in Jubail Industrial City II. PlasChem Park is a 12 km2 industrial park adjacent to Sadara and is being developed under the collaborative efforts between Sadara

and the Royal Commission for Jubail and Yanbu (RCJY). Under the agreement, Sadara will supply ethylene oxide (EO) and propylene oxide (PO) to the new ECSC facility in PlasChem Park over a period of 20 years. ECSC is a local Saudi company that specializes in providing oilfield chemicals for the oil and gas industry. Ziad Al-Labban, Sadara’s Chief Executive Officer, said “this strategic, long-term supply

agreement with ECSC is a key step forward in the development of the local oil and gas chemicals market. Capitalizing on TAQA and Halliburton’s combined knowledge and experience, and utilizing the chemicals that Sadara will be producing, we will together support the Kingdom’s oil and gas industry through the manufacturing of essential oil and gas chemicals locally.” “PlasChem Park is uniquely positioned to enable and support downstream opportunities in many market segments. Specifically, we will enable many industries that rely on EO and PO, supplying 60,000 tons of EO and 20,000 tons of PO per year via pipeline to the PlasChem Park tenants, and we look forward to welcoming ECSC as the first tenant and the second in Jubail 2 after the Dow Reverse Osmosis Membrane project. PlasChem Park investors will benefit from the many shared services that are being developed in PlasChem Park, simplifying and streamlining their operations in the long run,” said Mohammad Alazzaz, Director of Value Park, Sadara. Mohammed Y. Rafie, Chairman of TAQA and ECSC, said “we are delighted to have completed this agreement with Sadara and we have every confidence that this strategic relationship will fulfill our ambitious plan to create a world class chemical production facility in Jubail to support Saudi Aramco Exploration & Production activities and customers in the wider region.” The PlasChem Park is expected to attract diversified investments for downstream applications such as the production of oil and gas chemicals, construction materials, paints and coatings, as well as home and personal care products. These investments will create new jobs for Saudi nationals in the Kingdom’s downstream industry, as well as contributing to the fulfillment of the government’s vision to diversify the Kingdom’s economy.




US: The Shale Boom Has Already Gone Bust - At Least For Now The meteoric rise in U.S. oil production has ended, easing a global glut and driving a rebound in crude prices from below $50 a barrel, according to crude trader and hedge fund manager Andrew J. Hall.

Oil production from Texas to North Dakota peaked at almost 10 million barrels a day in February and has been falling since then, Hall said in a letter Friday to investors in Astenbeck Capital Management LLC, his commodities hedge fund. A drastic reduction in drilling rigs is starting to shrink U.S. oil output, according to U.S. government data cited by Hall.

That’s helped drive a 36 percent rally in the past six weeks, and prices will continue to rise because it will be harder for producers to ramp up than it was to cut back, Hall said in his letter. Lower crude prices have also boosted demand, while the risk of supply disruptions across the Middle East is growing amid sectarian tensions.

“We have now reached a turning point,” Hall wrote. Growing demand and supply pullbacks “rendered all the doomsday forecasts self-defeating.” West Texas Intermediate, the U.S. benchmark crude, settled at $59.15 a barrel Friday, marking a 3.5 percent rise for the week.

Astenbeck funds were up more than 10 percent through April, and gained 10 percent in 2014 even as oil fell by more than half, according to people familiar with its performance, who declined to be identified because the information was not public.

$100 Million

Known for making aggressive bets on rising oil prices, Hall became renowned in 2009 after being paid about $100 million while at Citigroup Inc., a bank that received government assistance during the financial crisis. For more than two decades he led Phibro LLC, a commodities trading company bought from Citigroup by Occidental Petroleum Corp.

Phibro is in the process of being shuttered by Occidental. Hall separated from Phibro last year and is now exclusively focused on Astenbeck. Founded in 2010, Astenbeck manages a total of about $3 billion.

Hall’s production estimate is based on weekly data from the U.S. Energy Information Administration. The EIA’s numbers have been closely watched by the market for signs that a record pullback in the number of rigs drilling for oil since October has begun to reduce output.

The EIA has predicted that oil output from major shale plays would begin to decline in April. Total average daily U.S. production will peak this year in the second quarter before falling by 210,000 barrels in the third quarter, the agency said in a report last month.




Oil Adjustments

Hall says the EIA data is derived from estimates at state agencies that generally lags months behind, making it “essentially an artifice.”

A more accurate gauge of U.S. output is an “adjustment” the agency uses, which, in addition to the weekly number, adds up changes to how much oil is in storage, how much was used in refineries and how much was imported and exported, Hall said.

Paul Sankey, an energy analyst at Wolfe Research, also noted the trend in a report Thursday to investors. The amount of production that isn’t accounted for has fallen “dramatically” in the last two weeks, suggesting U.S. daily output may have fallen by as much as 200,000 to 300,000 barrels in April, he said.

“That number seems high to us, but it does support the notion that U.S. production is rolling over at present,” said Sankey, a former analyst at the Paris-based International Energy Agency.

Buy Hate

Imports, refinery demand and storage level data all come from surveys the EIA conducts with oil companies. Export data comes from the U.S. Census Bureau. Production data comes from a variety of sources, including state and federal regulatory agencies.

In a perfect world, the supply and disposition would equal each other, said Mike Conner, a petroleum analyst at the EIA. But they often don’t, so the EIA uses the adjustment figure to balance it out.

“All we really know for sure is the supply components are not enough to make up for the volume on the disposition side,” Conner said. “We don’t know if the error is in field production, imports, refinery inputs or what have you. Different analysts are going to have different interpretations.”

Hall, who said earlier this year that he planned to invest in the shares of U.S. shale producers, believing they would rally, said it is now better to bet on oil.

“Many years ago we were told by a veteran of the commodities business that the secret to making money was to ‘buy it when they hate it and sell it when they love it,’” he wrote. “We do not base our decisions on nostrums but there is a certain logic to this old saw. The market is forward-looking. If the consensus is universally bearish then that view will already be reflected in the price.”




Russian oil production remains at post-Soviet high in April Source: Reuters+NewBase

Russian oil and gas condensate production, among the world's largest, remained at a

post-Soviet record level of 10.71 million barrels per day in April, underpinned by a recent recovery in oil prices, Energy Ministry data showed on Saturday.

Global oil prices jumped 21 percent in April to over $66 a barrel due to slowing

drilling activity and increasing political tensions in the Middle East, having collapsed from a peak of $115 per barrel in June last year. The price slump has significantly hurt the Russian economy, which relies on oil and natural gas for around half the federal budget revenues. Russia's GDP contracted by 3.4 percent in March year on

year.

Russian production of oil and gas condensate, a type of ultra-light oil, stood at

43.830 million tonnes in April, the data showed.

A Russian Energy Ministry delegation will fly to Vienna next month to meet officials

from the Organization of the Petroleum Exporting Countries. So far Russia, which is not an OPEC member, has failed to persuade OPEC to cut oil output in order to prop

up prices. Last month, OPEC oil supply jumped to its highest in more than two

years, boosted by record or near-record supplies from Iraq and Saudi Arabia.

Rosneft, Russia's leading oil producer, cut its oil production by 0.1 percent in April

to 3.81 million barrels per day. Total Russian oil exports via pipeline monopoly Transneft edged up by 0.7 percent to 4.4 million barrels per day, or 18.021 million tonnes in April.

Russia is aiming to increase its crude oil exports in the coming years and the Energy Ministry expects exports to be 3 million tonnes higher this year. Natural gas output was 52.64 billion cubic metres (bcm), or 1.75 bcm per day, down from 1.78 bcm per day in March. The Energy Ministry did not publish gas output data for Gazprom , the

world's top natural gas producer.




Oil Price Drop Special Coverage

Brent rattling around towards $66, today Reuters + NewBase

Brent crude oil prices ups and downs the $66 a barrel on today Monday 4th May 2015 as weak Chinese data added to demand fears, while near-record supplies from OPEC producers maintained worries about oversupply.

China, the world's second-largest oil consumer, posted its biggest drop in factory activity in a year to 48.9 in April, a private business survey showed on Monday. The sub-50 point level indicates a contraction compared with the previous month.

The data came on the heels of a top government think tank's forecast that China's economic growth could slow further to 6.8 percent in the second quarter.

"The Chinese data is weaker but it seems the oil market has had a limited reaction. What the market really wants to see is supply being cut to match the demand level," said Ric Spooner, chief market analyst at Sydney's CMC Markets.

Oil supplies from the Organization of the Petroleum Exporting Countries, which produces about 40 percent of oil supplies, climbed 0.2 percent to a more than two-year high in April, a Reuters survey showed.

Brent June crude futures dropped 11 cents to $66.35 a barrel by 0412 GMT, after hitting a 2015 peak of $66.93 on April 30. U.S. June crude declined 7 cents to $59.08 a barrel. WTI hit its highest this year at $59.90 on May 1.

Brent crude has recovered by more than 40 percent since its near six-year low of $45.19 a barrel in January, as geopolitical tension in the Middle East and declining U.S. rig counts provided support.




Both Brent and U.S. crudes posted their biggest monthly price rise in nearly six years in April.

But the U.S. oil rig count is beginning to decline more slowly, after falling for a record 21 straight weeks to its lowest level since September 2010, in a possible sign that the collapse in drilling could be coming to an end.

Speculators cut their net long U.S. crude futures and options in the week to April 28, the Commodity Futures Trading Commission said on Friday. Investors could look towards the U.S. nonfarm payrolls data later this week for oil price direction based on the greenback's strength, analysts said.

A stronger dollar makes dollar denominated commodities, including oil, more expensive. "We would expect prices to move upwards after U.S. crude inventories (data) but this upside could be dampened by a stable USD strength," Phillip Futures said in a note on Monday.

Excluding the global financial crisis, oil prices are now at their lowest level in a decade, roughly 50% below last year's peak of $115. Oil exporting countries are facing significant headwinds, but the strength of the headwinds vary substantially among them. The cost of producing a barrel of oil diverges significantly between countries.

The main reason for the difference resides in the extraction method. According to Morgan Stanley, oil prices must be above $65 per barrel for the average North American shale company to be profitable. Extracting oil from sands, a common method in Canada and the Arctic, is even more expensive, with an average price of $70 and $75 per barrel respectively. In stark comparison, the average cost of onshore, close to the surface Gulf oil is only $27 per barrel.




Worley Parsons Cuts 2,000 Job on Falling Oil Prices; Shares Slump Worley Parsons Ltd., Australia’s largest oil services business, said second-half earnings will fall about 50 percent from the first half as it cuts 2,000 jobs and reduces work due to falling commodity prices.

There will be about A$125 million ($98 million) in one-time costs to pay for redundancies and cancel rental contracts early, in particular in North America, the Sydney-based engineer said Monday in a statement. The forecast drop would result in net income of about A$52 million, about 62 percent below the A$137 million median of three analyst estimates for the period compiled by Bloomberg.

Falling oil and gas prices are challenging the profitability of the energy companies that buy WorleyParsons’ services, with a tally of U.S. oil rig numbers falling 55 percent over the past 12 months. The company gets about 73 percent of its revenue from oil and gas and just over 50 percent of its sales are in Canada and the Americas.

“WorleyParsons has experienced deterioration in workload since February,” the company said. The changes were needed “to adjust its business to market conditions.”

Shares in the company fell as much as 12 percent, the biggest drop in nearly 18 months, and were down 10 percent at A$10.31 at 11:16 a.m. in Sydney. The stock has risen 2.3 percent so far this year, trailing an 8 percent gain in the S&P/ASX 200 benchmark.

West Texas Intermediate crude oil futures have risen 6 percent this year but remain 35 percent below their level a year earlier. U.S. oil production, which has nearly doubled since 2009, has leveled off so far during 2015.




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Khaled Malallah Al Awadi, Energy Consultant MS & BS Mechanical Engineering (HON), USA Emarat member since 1990 ASME member since 1995 Hawk Energy member 2010

Mobile: +97150-4822502 [email protected] [email protected]

Khaled Al Awadi is a UAE National with a total of 25 years of experience in the Oil & Gas sector. Currently working as Technical Affairs Specialist for Emirates General Petroleum Corp. “Emarat“ with external voluntary Energy consultation for the GCC area via Hawk Energy Service as a UAE operations base , Most of the experience were spent as the Gas Operations Manager in Emarat , responsible for Emarat Gas Pipeline Network Facility & gas compressor stations . Through the years, he has developed great

experiences in the designing & constructing of gas pipelines, gas metering & regulating stations and in the engineering of supply routes. Many years were spent drafting, & compiling gas transportation, operation & maintenance agreements along with many MOUs for the local authorities. He has become a reference for many of the Oil & Gas Conferences held in the UAE and Energy program broadcasted internationally, via GCC leading satellite Channels.

NewBase : For discussion or further details on the news above you may contact us on +971504822502 , Dubai , UAE

NewBase 04 May 2015 K. Al Awadi




NewBase 596 special 04 May 2015

Economy & Finance

electricity sector

subsidy regime

allocation of subsidy

omani government

government customer

khaled al awadi newbase

electricity regulation

tariff reform