Fuel For Thought
January 2015

Oil Price Slump Boosts Egypt Fuel Subsidy Phase-out

▪ Oil Price Slump Boosts Egypt Fuel Subsidy Phase-out

As oil prices fell to five-year lows of US$50 a barrel in January 2015, leading economists in Egypt ramped up calls to slash fossil fuel subsidies. Egypt is one country with a subsidy phase-out plan that is benefitting from the lower price.

The government expects to spend around US$10 billion on energy subsidies this financial year, petroleum minister Sharif Isma’il told the Middle East Economic Survey last month. That is 30% less than originally forecast, as lower commodity prices reduce the subsidy needed to guarantee regulated consumer prices. The government launched a five-year plan to eliminate subsidies on petrol, gas and electricity in July 2014, before the oil price tanked.

Fossil fuel subsidies had grown to 11% of GDP in 2013, according to the International Energy Agency (IEA), absorbing seven times as much public money as healthcare. That was comparable to the size of the country’s budget deficit, which the government is trying to close.

“Subsidies constituted a huge, huge burden on the budget,” Cairo-based environmentalist Hoda Baraka stated. “Last year, because of the severe economic situation, the government decided it was a reality that had to be faced, even though they knew that people would not be happy.”

The oil price crash has relieved some of the pressure on that budget.

Baraka, a communications manager for campaign group 350.org, said it was a chance for Egypt to build a future on clean energy. At the same time, the World Bank urged all oil-importing countries to eliminate fuel subsidies while prices are low. It echoed IEA chief Maria van der Hoeven’s message to policymakers last month. This is a “golden opportunity” to price up carbon, she said. Some 40 countries continue to subsidise fossil fuels, the IEA found in its 2014 World Energy Outlook. Iran was the heaviest subsidiser of fossil fuels in 2013, pouring US$80 billion into the sector, or 23% of GDP. Venezuela, Algeria, Libya, Uzbekistan and Turkmenistan also spent more than 10% of GDP on energy subsidies.

(09-January 2015)

▪ Indonesia to Scrap Petrol Subsidies

Indonesia has scrapped price subsidies for petrol from 01-Jan 2015 and link retail prices to international oil markets. From midnight on Thursday 01-Jan 2015, the government will stop subsidising petrol prices altogether. “Prices will be evaluated every month,” Economic Minister Sofyan Djalil stated. He added that since world oil prices have fallen, the government felt there was no need for petrol subsidies.

However, the price of petrol will be cut to 7,600 rupiah (US$0.61) per litre, from 8,500 rupiah (US$0.68) per litre to reflect falling global oil prices, reported the Wall Street Journal, citing Energy and Mineral Resources Minister Sudirman Said.

Indonesia will continue subsidising diesel prices, but the amount of the subsidy will be fixed at 1,000 rupiah per litre, reported the Wall Street Journal.

The removal of the subsidies is part of Indonesia’s bid to free up more funding for infrastructure spending.

(03-Januray 2015)

▪ Indonesia: Pertamina Shall Be Ready To Produce More RON 92 Fuel

Indonesia needs to gradually switch the use of subsidized RON 88 fuel to RON 92 fuel and for gasoil from 0.35% sulphur content to 0.25% sulphur content. RON 92 is relatively easy to be found in the regional market as there are many suppliers when compared to RON 88 fuel. The change to RON 99 is also considered as environmentally friendly and also more efficient.

The recommendation to switch the use of RON 88 to RON 92 subsidized fuel was made by the Oil and Gas Governance Reform Team. The team was formed by the Government to assist with some recommendations on improving the policy related to oil and gas management, the institution to manage the business including stopping the illegal action of the seller’s cartel in the country. The team said that the RON 92 fuel may also be given certain or fix subsidy. The recommendation is expected to be implemented by Pertamina in the next five months to allow Pertamina to increase production of RON 92 and Gasoil of 0.25% sulphur content. According to the Chairman of the Team, Faisal Basri, he has discussed the recommendation with the state owned oil and gas company, Pertamina. He also said that in principle, Pertamina will prepare the implementation of the country wide use of RON 92. Faisal said that Pertamina need to reconfigure its refineries or adding Methyl Tertiary Butyl Ether (MTBE) to be able to produce RON 92 fuel.

However, the fuel switch will also increase the fuel import as Pertamina may still not be able to supply total domestic demand. Nevertheless, in longer-term, it will generate some positive impacts for the supplier as well as the consumer for that the RON 92 and diesel 0.25% sulphur content fuel are more efficient, most compatible with all types of vehicles and environmentally friendly when compared to the existing RON 88 fuel and 0.35% sulphur content fuel. According to Faisal, Indonesia is the only country in the region to import RON 88 fuel which may create the opportunity of the seller cartel to influence the import of RON 88 fuel to Indonesia and if the supplier cannot supply then it will create fuel shortage in the country. In the case of RON 92, Indonesia may import from many countries and suppliers, so it will not only create better transparency in the import process but also will reduce the county’s dependency on one supplier.

(06-January 2015)

▪ Shell Ends US$6.5b Qatar Project as Oil Prices Fall

Qatar Petroleum and Royal Dutch Shell have scrapped plans for a petrochemicals project, worth an estimated US$6.5 billion, due to the slump in global oil prices.

In a statement issued on Wednesday (Jan 14), Shell said the Al Karaana project would not go ahead because of the "high envisaged capital cost that has rendered it commercially unfeasible, particularly in the current economic climate prevailing in the energy industry".

The joint venture between the Anglo-Dutch energy giant and state-owned Qatar Petroleum had been signed in December 2011. At the time it was envisioned that a huge "world-scale petrochemicals complex" would be built in Ras Laffan, an industrial city some 80 kilometres north of Doha.

The Qatari company was to own 80 per cent of the project, and Shell the remaining 20 per cent. Last year it was reported that the project would be completed in 2018. However, the decision not to proceed was taken, said Shell, after "careful and thorough evaluation of commercial quotations".

"The fall in oil prices is clearly playing its part," said analyst Keith Bowman at UK-based stockbroker Hargreaves Lansdown about the collapse of the project. "The estimated return on their investment for both companies will have fallen".

Global oil prices have dived since last June and continued to fall on Wednesday after major crude producers insisted they would maintain current output levels despite oversupply.

(15-January 2015)

▪ US: Oil Plunge Forces Baker Hughes to Cut 7,000 Workers

Oilfield services company Baker Hughes said on Tuesday (Jan 20) it would cut 7,000 jobs in the coming months in response to a sharp downturn in exploration activities following the oil price crash.

One of the three top oilfield services firms, Baker Hughes said the cuts, amounting to about 11 per cent of its worldwide staff, would come mostly in the first quarter of this year.

The move will cost the company upfront about US$160-US$185 million in severance charges, but aims to cut costs over the medium term as the overall industry contracts in response to the more than 50 per cent fall in oil prices in the past seven months. Baker Hughes is also reducing capital expenditures by 20 per cent.

"This industry can't simply hope and wait for oil to climb back over US$100 a barrel. Instead we must adapt to a new reality of sustained lower commodity prices," Martin Craighead, the chairman and chief executive of Baker Hughes, told analysts in a conference call.

Last week oil services industry leader Schlumberger said it would cut 9,000 jobs, about 7.5 per cent of its global workforce, due to plunging oil prices that have forced petroleum companies to cut drilling budgets.

And last month Halliburton, the number-two oil services provider, said it would lay off 1,000 people, 1.25 per cent of its work force, to deal with the market changes.

(21-January 2015)

▪ India: Carmakers Adjust Production Plans As Buyers Return To Petrol Cars

Sales of petrol-powered vehicles have gained significantly in the past few months, already aggregating around 58% of domestic sales. Carmakers are skewing their New Year production plans in favour of petrol-powered vehicles, in line with buyer preference that is increasingly shifting away from diesel. The narrowing price gap between petrol and diesel as well as higher prices of diesel vehicles due to their expensive technology are prompting buyers to again consider the traditional fuel. Manufacturers are finalizing production plans based on current trends, and most players say they are planning to roll out a higher number of petrol cars in 2015. Sales of petrol-powered vehicles have gained significantly in the past few months, already aggregating around 58% of domestic sales. The share is expected to reach 60% if the trend continues. Manufactures that predominantly make diesel-powered vehicles are facing the pinch.

Until a year ago, demand for diesel models was far more than petrol as government subsidies kept the heavier fuel cheaper, forcing auto makers to make more diesel-run variants. "The market is clearly moving towards petrol cars and so are manufacturers toeing this trend," said Rakesh Srivastava, senior vice president for marketing and sales at the Indian unit of Hyundai Motor. Petrol variants account for two out of every three cars the South Korean company sells in India. Fuel price is one of the key influencers for new car buyers. It forms a third of the total cost of ownership in case of a passenger car - the remaining are vehicle price and maintenance cost. Diesel, which was about Rs 20 a liter cheaper than gasoline in January last year, has lost its comparative advantage because of the huge premium on diesel-run cars even as the price difference reduced to about Rs 11 a liter. Petrol now costs Rs 61.33 a liter in Delhi pumps, while diesel is priced at Rs 50.51.

Experts credit the government for bringing diesel rates to its realistic levels. In June 2010, the then Oil Minister Murli Deora decontrolled both petrol and diesel. While the government allowed state-run retailers to sell petrol at market rates, diesel decontrol wasn't made formal fearing political repercussion. Because of this skewed pricing policy, diesel prices rose just Rs 1 per liter between June 2010 and June 2011, but petrol prices jumped more Rs 12 per liter. This had led many buyers to prefer diesel vehicles. This gap widened further until Veerappa Moily, when he was the oil minister in the Congress-led government, decided to tame diesel subsidies. The Cabinet decided in January last year to raise diesel prices by 50 paise per liter every month until its pump prices are aligned with market rates.

Meanwhile, with falling international oil prices, the losses on selling diesel at state-set prices fell sharply and, from September 2014, state oil marketing firms have been making a positive margin on fuel sales. Taking advantage of the situation, the Narendra Modi government deregulated diesel prices in mid-October. The changing customer preference is hurting auto makers focused on diesel vehicles. Utility vehicle major Mahindra & Mahindra, primarily a diesel player, has announced weekly production cuts until March 2015 to reduce stocks of its diesel vehicles. Tata Motors is seeing a shift towards the newly launched Revotron petrol engine in its newly launched Zest compact sedan. Tata Motors President Mayank Pareek said demand and sales of petrol models are increasing and the overall market is expected to be divided with 60% in favor of petrol cars. Honda Cars India, which previously made only petrol cars, introduced diesel engines last year because of the then market scenario. The company now is adopting a flexible plan to produce as per market demand. 72"Current data portray customer's preference for petrol and Honda sales are now evenly divided for both the fuels," Senior Vice President for Marketing and Sales Jnaneshwar Sen said. Analysts tracking the market say the shift will become more pronounced in the coming months. "We expect petrol cars to rule in market in the near term," said Amit Kaushik of IHS Automotive. Maruti Suzuki, the nation's largest carmaker by volume, has decreased production of diesel vehicles by 20 per cent, while has peaked production for petrol models such as the Celerio, Alto and WagonR.

(January 2015)

▪ China Takes 'Zero Tolerance' Approach To Regional Polluters

China will take a "zero tolerance" approach to a wide range of environmental violations and has promised stronger action against regional governments that protect polluters or hinder inspections, according to a Cabinet document. Authorities across China have been ordered to take part in a comprehensive inspection program to be completed by the end of 2015, said the policy document that was recently released on the official government website. The program's findings will be released publicly under a policy of enhanced transparency and accountability, it said, and any regional regulations that hinder enforcement of national environmental legislation must be annulled by June 2015. The cabinet also approved draft amendments to China's air pollution law that include unlimited daily fines if violators do not rectify problems, the China Daily newspaper reported.

Polluters currently pay a one-off fine of up to 200,000 yuan ($32,595). Enforcement remains one of the government's main concerns, with the Ministry of Environmental Protection complaining last month that some regions preferred "form over substance" when it came to implementing new guidelines. The proposed changes include making local governments more responsible for air pollution in their regions, according to experts. That complements moves to incorporate protection of the environment into the criteria used to assess local leaders’ performances. In announcing the changes, the State Council said those enterprises with excessive emissions or that counterfeit data should be punished. Some environmental experts have previously said enforcement of existing laws has been spotty, and that companies routinely flout pollution regulations.

Wang Canfa, an environmental specialist at China University of Political Science and Law, highlights that the announcement of the new environment law was made by the State Council - China's top policy making body. "This shows that the state has placed great emphasis on the execution of the law," he tells The Paper. In addition to strengthening environmental laws, China’s government is undertaking relatively aggressive action to change its energy sources, moving away from coal and relying more on hydropower, natural gas and other lower-emission sources of energy. Leaders have pledged to stem growth in coal consumption as a way to fight pollution and curb carbon emissions. In April, the legislature amended the country’s environmental-protection law, strengthening the enforcement powers of regulators, among other changes.

(January 2015)

▪ Europe: Biofuels Back in European Parliament’s Spotlight

Nils Torvalds, the Finnish Liberal Member of European Parliament (MEP) who has been appointed as the new rapporteur on a controversial proposal to cap European Union biofuel subsidies, on Wednesday presented a second reading agreement to MEPs on the European Parliament's environment committee.

The EU's biofuel policy, agreed to in 2008, is accused of causing land-grabs in developing countries, a rise in global food prices, and even of generating more emissions because of indirect land use change (ILUC) - the result of the increased use of land to grow the crops used for biofuel.

In 2012, the European Commission proposed to adjust the EU's biofuel policy in order to make the use of biofuel thought to cause ILUC, so-called 'first-generation biofuel', less advantageous. But the makers of these biofuels reacted furiously, claiming to have invested based on a promise of EU subsidies until 2020. They also say the science behind measuring ILUC is too uncertain to use as a base for policy.

Work on the proposal ground to an abrupt halt in 2014 when the European Parliament approved a first-reading position on the file but voted against giving Corinne LePage, the French liberal MEP who was rapporteur at the time, a mandate to start negotiations with the Council of Ministers. This meant work on the file had to restart and enter a 'second reading' phase. The main difference is that the Parliament must now work from the adopted first reading position of the Council rather than the Commission proposal.

LePage was defeated in the European Parliament elections last year. Torvalds has signalled a more conciliatory approach toward the biofuel sector. "I think it's reasonable to give those who invested a reasonable return on their investments," he said, but added: "I would actually like to see [first-generation biofuel] phased out. When you have got your money back you should probably be able to phase out."

(23-January 2015)

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