TEHRAN — Commenting on Saudi Arabia and UAE capabilities to make up for any shortfalls in energy supply, Dr. Albert Bininachvili says the U.S. decision to drive Iran’s oil export to zero is the biggest risk to global energy markets.
The Trump administration sharply accelerated its goal of driving Iran’s oil exports to zero, ending sanctions exemptions that it previously granted to some of the Islamic Republic’s biggest customers.
The market widely expected Washington to extend the waivers for five of the countries. However, the administration says that any country still importing oil from Iran will be subject to U.S. sanctions beginning on May 2.
“Saudi Arabia and others in OPEC will more than make up the Oil Flow difference in our now Full Sanctions on Iranian Oil,” Trump said in a tweet on 22nd of April after he ordered a tightening of sanctions on Iran’s oil exports.
To shed more light on the issue we reached out to Dr. Albert Bininachvili, a professor of political science at the Columbia University for an interview.
Here is the first part of the interview: Answering our question on the possibility of the driving of Iran’s oil export to zero and the Saudi Arabia and the UAE’s capabilities to make up for any shortfalls in oil supply, he said,“The US decision to strictly re-impose secondary sanctions on Iran by denying waiver extensions to eight countries that had been buying Iranian crude makes the future of Iran’s oil exports (which amounted to up to 2.4m bpd before sanctions were imposed) the biggest supply risk to the global energy markets, especially against the backdrop of political turbulence and output losses in Libya and Venezuela. The ability of other oil producers to bridge this impending supply shortfall is about to be tested.
Most energy experts believe the Trump administration’s decision can only work with the backing and cooperation of Saudi Arabia, the United Arab Emirates and other Persian Gulf producers to avoid an undersupplied oil market and spiking crude prices.
However, the circumstances are different than the lead-up to Washington renewing sanctions on Iran in November
2018 when the two leading Gulf producers and other crude suppliers, including Russia, turned up their oil taps only to find themselves outwitted by learning that the Trump administration had granted waivers — significant reduction exceptions (SREs) — to Tehran’s top crude buyers.
Riyadh and Abu Dhabi are making it clear that cooperation in replacing Iranian oil exports will now be on their terms.
Saudi Oil Minister Khalid al-Falih struck a cautious tone in comments regarding the end of the waivers, saying: “In the next few weeks, the kingdom will be consulting closely with other producing countries and key oil-consuming nations to ensure a wellbalanced and stable oil market.” Riyadh evidently is not interested in another oil price crash.
Falih later stressed that, because the oil market is “well-supplied,” Riyadh didn’t perceive urgency in boosting production in May, when SREs to eight nations expire. “We will be responsive and we think there will be an uptick in real demand but certainly we are not going to be pre-emptive and increase production,” he said.
UAE Oil Minister Suhail al-Mazrouei made a similar point earlier in April at a conference in Abu Dhabi, saying “I think we have learned the lesson… We will not jump the gun, pre-produce the volumes that are not required yet.”
The two Gulf oil powerhouses seem politically committed to doing their part to undermine Iran’s economy and ideally marginalize its influence in the greater Middle East. But Riyadh and Abu Dhabi know the oil market is tighter and more vulnerable than six months ago, the result of slowing global demand, rising crude inventories, less Venezuelan and Libyan oil available due to internal strife in these countries.
Given that Saudi Arabia and the United Arab Emirates are being tasked with replacing Iranian oil and preventing a major oil market disruption, Riyadh and Abu Dhabi tend nevertheless to avoid reckless and hasty steps on moving precipitously while they assess market conditions, determine their best course of action and protect their financial self-interests.
Energy executives familiar with Saudi decision-making process are certain that Riyadh would only respond after it thoroughly assessed the impact on the oil market from the expiration of sanctions. In other words, they may let the oil market continue to tighten before they add supply.
Saudi Arabia and the United Arab Emirates have been instrumental in the OPEC+ alliance that has withdrawn as much as
1.2 million barrels per day (bpd) of crude from the market over the last year, a major contributor to a tightening of global oil supply. Saudi Arabia has assumed the lion’s share of the cuts agreed to by the alliance, pumping well below its assigned quota of 10.31 million bpd at 9.79 million bpd in March.
Technically, Saudi Arabia and the United Arab Emirates could collectively boost oil output by as much as 1.5 million bpd reasonably quickly. As the biggest OPEC producer Saudi Arabia produced 9.82 million barrels a day in March and can pump an additional 1 million barrels a day within a short period.
The U.A.E. can increase output to 3.5 million barrels a day from a current level of 3.045 million.
That volume would handily accommodate the loss of Iran’s remaining 1 million bpd of exports, although the United States is unlikely to see Iranian crude sales drop to its “zero” target goal.
Interestingly, to cover the first 1million bpd of the lost Iran’s share, Saudi Arabia and UAE do not need to transcend their respective OPEC allocated quotas as both countries are still underperforming. Saudi Arabia can lift output and still abide by the deal because it is currently pumping about 500,000 bpd below its quota. UAE also stays 400.000 bpd below.
They are unlikely to increase output over the existing quota before the OPEC+ summit in June, where new ceilings may most probably be reserved for the spare capacity holders.
However, the two Gulf producers would be unable to maintain that higher output indefinitely and what is particularly important, it would greatly diminish global spare production capacity, a critical factor should unexpected crises arise.
OPEC and allied suppliers including Russia agreed to limit their production until the end of June to buttress crude prices and avert a glut. They are due to meet in June to decide whether to extend the cuts.
Russia’s crude and condensate output increasing slightly in 2019 to 558 million tons, or 11.21 million barrels a day.
That, on the surface, would suggest that the impact on oil prices from the expiration of Iran sanctions waivers could be limited. Saudi Arabia could replace lost Iranian supply barrel-for-barrel, at least in short term perspective. However, while Riyadh could ramp up production, it would also need to do so at a cost to its spare capacity. Buyers won’t have trouble finding enough supply, but the loss of a big chunk of spare capacity has historically been a driver of higher prices and higher volatility.
If the United States succeeds in reducing Iran’s crude exports close to zero, in line with its stated policy, Saudi Arabia would have to raise its production to unprecedented levels to cover the loss.
And it would leave the global market tighter than at any time since the oil shocks of 1973/74 and 1979/80, with resulting upward pressure on prices.
The question is where exactly will the replacement barrels come from?
The estimates of the International Energy Agency show that OPEC members held
3.4 million bpd of spare capacity, while their non-OPEC allies had no more than
Saudi Arabia accounted for almost two-thirds of the reported OPEC spare capacity (2.02 million bpd), with smaller volumes held by Iraq (330,000 bpd), United Arab Emirates (330,000 bpd) and Kuwait
Russia accounted for most of the nonOPEC spare capacity (roughly 250,000 bpd) with little or no available spare capacity in the other non-OPEC allies.
But using the IEA’s figures, it is clear Saudi Arabia would need to increase production and exports by at least 1 million bpd to cover the total loss of Iranian barrels.
The Saudis claim that their spare production capacity is between 1.5 million bpd and 2 million bpd. The EIA defines spare capacity as the volume of oil production that can be brought online within 30 days and sustained for at least 90 days.
The problem with this estimate is that it has never been tested. According to the U.S. Energy Information Administration, the kingdom has never produced more than
10.42 million bpd on an annual basis (2016) or 10.63 million bpd in a single month (July
2016) in the last 20 years.
Although, in theory, it may seem there is sufficient spare capacity in Saudi Arabia and other countries, to compensate for the loss of Iranian export, but it would leave the global market with less than 1 million bpd of capacity left to meet all other contingencies.
In practice, the market could become much tighter, with sanctions essentially using up all the spare capacity worldwide and eliminating this vitally important “shock-absorber”.
Maximum production would require opening the chokes on existing wells and bringing previously shut-in wells back into service. Boosting production this way might risk a decline in oilfield pressure that could result in long-term damage to the reservoirs.
And it is not clear whether the midstream infrastructure, i.e. pipelines, processing plants and export terminals have enough capacity to handle 12 million bpd because such high flow rates have never been tested.
The Saudis and their OPEC allies seem aware that using their spare capacity is a now a double-edged sword: it may cool down prices, but the impact could be limited by the risk-premium as the market worries about what’s left.
Spare capacity is a fluid concept. For some, it means extra output that can flow at the flick of a switch. Realistically, most industry executives define it as production that can be brought on stream in 30 days, and then sustained for a at least three months. Beyond that, some of the spare capacity is simply oil on the ground that can be pumped by drilling new wells, requiring more time.
Over the years, Saudi Arabia has been traditionally secretive about how much of its spare capacity falls in each bucket. But Ali Al-Naimi, who was oil minister for nearly 25 years until 2016, offered a glimpse in 2012.
“I believe we can easily get up to 11.4,
11.8, almost immediately in a few day,” AlNaimi told CNN in 2012. “All we need is to turn valves,” he added. The other 700,000 barrels a day to reach about 12.5 million requires three months of work, however. “And the 90 days is for one thing: to mobilize additional drilling,” he said.
There’s one more complication: of the
12.5 million barrels a day, only 12 million is controlled directly by state-owned company Saudi Arabian Oil Co, or Aramco. The other
500,000 barrels a day lies in the so-called Neutral Zone shared with Kuwait. But the region hasn’t produced a single barrel for nearly two years due to a dispute between Kuwait and Riyadh.
Beyond production, Riyadh has another line of defense to meet a supply outage like Iran: a vast network of storage facilities, both in the kingdom and overseas, that can be drawn down temporarily.
As well as domestic storage, Saudi Arabia has filled up its strategic storage in Okinawa, Japan; Sidi Kerir in the Mediterranean coast of Egypt; and in the European oil hub of Rotterdam.
Moreover, Riyadh and the rest of OPEC are taking measures to reinforce its production machine: it has brought on stream
300,000 barrels a day of new production from the Khurais oilfied. The expansion was meant to compensate declines elsewhere, but over the short-term it could help to boost spare capacity.
Others within OPEC are also trying to follow suit. The United Arab Emirates is bringing forward the expansion of the offshore Umm Lulu and SARB fields, which will pump 129,000 barrels a day by the end of the year, up from 50,000 barrels a day now.
Iraq is bringing on stream the expansion of its Halfaya oilfield, doubling output to
400,000 barrels a day.”
In conclusion Albert Bininachvili noted, “Yet, despite the efforts, the Saudis and OPEC face a huge challenge to replace Iran. It is hard to disagree with Patrick Pouyanne, the CEO of Total, who puts it in simple terms: “You need to mobilize the wells, the rigs… It’s not immediate. In our industry, you don’t push a button and then oil flows. It’s more complex!””
Saudi Arabia and the United Arab Emirates have been instrumental in the OPEC+ alliance that has withdrawn as much as 1.2 million barrels per day (bpd) of crude from the market over the last year, a major contributor to a tightening of global oil supply.