The not so slow motion demise of the Euro has major energy implications. Iran has, in the past, sold most of its crude in Euros (still trying to update the current exposure). Thus, not only have they lost 20% of the value of their crude from the mid $80 level, but another 20% in funds, versus other currencies. Russia is exposed, to a lesser extent (as percent of GDP), but on many more barrels of oil and product. Knock on effects to weaken import prices at PADD 1 (East Coast US) destinations are possible, although less likely since Brent is priced at such a premium to US grades, for now.
The geopolitical risk is that Iran’s ‘breakeven’ oil cost is something north of $80/barrel, given the collection of subsidies and social programs, which include the country’s status as a significant net importer of gasoline. And Iran’s oil minister has recently briefed lawmakers on investments required to sustain Iran’s petroleum industry. He believes the country needs to invest $25-30 billion a year to avoid becoming a net importer. The 2010 budget, while much higher than the prior year, is in the $20 billion range. This does not appear to be a stable situation.
I wrote, earlier this month, that the Russian government is making progress toward some form of new fiscal terms for its oil industry. The current export tax, essentially 90% above $29 oil, is clearly onerous and has gradually eroded reinvestment economics (after the easy oil of 2002-6). The tax is also revenue, not earnings, based, further discouragement for new, more capital intensive projects which, from experts, are not the high quality of legacy Western Siberian production.
However, more recent reports suggest that the government is basing its 2010 budget on $95 oil and the existing fiscal structure. Since ‘modernization’ of the fiscal terms is likely to REDUCE revenues, and prices seem unlikely to average $95 this year, the chances of significant change seem remote. Moreover, if oil prices average only $70, the net would be a 4% deficit in 2011, enough to halve the rainy day fund (once over $225 billion, now around $60. Thus, it would seem that the need to restructure the ‘take’ from the industry, while necessary, is unlikely. Over the intermediate term, this is BULLISH for oil prices, as Russian output is that much less likely to grow without fiscal reform.
Jordan, Kuwait, the UAE, and Egypt are advancing plans to build and operate world scale nuclear power plants in the next decade. The UAE expects to use nuclear power to supply 25% of domestic power needs by 2020. Jordan has initiated site studies for its first plant, which would provide about 20% by 2020. Egypt has four projects in the queue for commissioning by 2024, and Kuwait has inked deals with French representatives for both nuclear and renewable projects of undetermined size.
Apropos of nothing, and I didn’t make this up – Venezuela’s Hugo Chavez has a Twitter account. He was recorded using it to communicate pending oil deals, adding to $40 billion, to be announced soon.