Coal Market Analysis in the next 5 years. Final work for Coursera's Seminar on Fundamentals of Global Energy Business

Coal Market Analysis in the next 5 years:

Jose Luis Chalhoub

Preview:

Coal has been known as the most damaging source of energy for the environment and highly contaminant, and this is why many efforts have been carried out by especially the OECD nations to reduce their overall consumption and demand in the last years. But still non OECD nations and emerging economies still remain highly consumers of coal for their economic growth, which still remains one of their top source of primer energy for industrial consumption overall. 

Currently, worldwide 30% of total energy demand and over 40% of the electricity generation comes from coal, according as well to the International Energy Agency: 

https://www.iea.org/publications/insights/insightpublications/21stCenturyCoal_FINAL_WEB.pdf

Causes for the decline in reserves of coal: 

In terms of the decline in reserves of coal globally, this happened mainly because of:

Limited investments in technology needed to extract coal and also for its production, at the time due to the impact to the environment, and based on the global commitments made under the umbrella of the Climate Change Agreements. 

Many countries including the top consuming nations like China and India and also the United States have taken steps to reduce carbon emissions, so this has and would have also influence in the demand and supply of coal as a primary energy source, 

Even if coal has been always considered since long time ago as top source of electricity, so much needed in emerging economies and the developing world. 

 Historical market conditions for coal based on supply and demand:

According to the International Energy Agency, coal use started ever since the Industrial Revolution and hence never stopped growing globally, and will be significant in the future, and in this regard, greater efforts are needed by governments and companies to embrace less polluting and more efficient technologies to ensure coal becomes a cleaner source of energy in the decades to come.

In this sense, it turns to be significant that from 2000 to 2012, coal resulted to comprise 46% of total added global primary energy, that is, the amount of global coal supplied was 1520 MTOE of the 3292 MTOE of additional global primary energy in the aforementioned period, and 200 MW/day was the total new coal generation capacity commissioned in the world in 2010 through 2014.

Even if the outlook for coal does not seem to be dwindling down so far, at least not in the next 5 years, due to the increased demand coming from China and India, and also from the United States, the coal industry has been experiencing an important decay in the last 15 years or more, especially from the 1990’s from the supply side, which has been decreasing at a faster pace than the demand.

Based on the ongoing ever stricter environmental regulations being progressively implemented by the EU, the US, in sum, the coal market overall has a long history of supply and demand struggles and definitely we are experiencing one today, when all things related to the environment are being so much subjected to public opinion scrutiny, and when natural gas everyday appears to be the cleanest substitute for coal in terms of electricity generation so far.

Main causes and determinants for increase in demand of coal:

1.) Increased levels of international trade and economic growth specifically in whats been called the emerging markets.

2.) Strategic role of China and India in the demand of coal in the last decade due to their sustained pace of economic growth based on the position played by coal in their respective energy mix.

3.) Since no major and massive technological advancements and breakthroughs are needed to revamp and install new facilities for coal production, then the rate of production of coal will keep up its pace in the next years which will meet the increasing demand from China and India.

4.) According to the International Energy Agency, coal consumption will climb to 4.32 billions of tons of oil equivalent for 2017, and the role of coal in the share of global energy mix will continue to grow in the next decade if no stronger policies are applied, the coal will catch up will oil in terms of demand globally.

Future in the short and medium term for coal in the US and globally: 

But now when we have an election in the US with one candidate Donald Trump, supporting strongly the revival of the coal industry in USA, maybe we could see a resurgence of this source of energy in terms of supplies, that is if Mr Trump gets to win the next presidential elections in November, which could be a boost for coal, with China and India not backing off their demand of coal even if India signed recently the Climate Change Agreement just days ago.

Also the global efforts to find and develop new sources of non renewables energy and also the relevance gained by the natural gas as the substitute of petroleum have in general overshadowed the development of coal as top primary source of energy. 

I would like to share this link, which is about a report done by the World Energy Council about current status of coal worldwide which might be of use for this submission as complimentary reading.https://www.worldenergy.org/wp-content/uploads/2013/10/WER_2013_1_Coal.pdf. Here is another link as complimentary: http://www.reuters.com/article/us-europe-energy-exchanges-idUSKCN11B1Q8?feedType=RSS&feedName=GCA-Commodities&utm_source=dlvr.it&utm_medium=twitter. 

With current oil prices and if they keep this sustained pace, and depending also on the pace and speed of economic growth of countries like China and India, the latter experiencing a higher growth than the latter and its economy based on coal as well, then we could foresee in the next 5 years a rise in the demand of coal and also an increasing incentive for new efforts of exploration and discoveries of new sources of coal to expand the current base of reserves globally, 

But it could happen that these efforts could be undermined if the price of coal rise significantly, and also we will see natural gas as a stronger competitor for coal and with more use as per electricity generator and also cleaner than coal for this end use, which would also contribute to the downsizing of coal reserves and also more efforts by OECD countries especially the ones transitioning to the use of non renewables in Western Europe specifically.

Mosul, Iraq and risks for the oil industry

Recently the 2nd largest city in Iraq, Mosul, has been the new epicentre of fresh violence in the sectarian field between shiites and sunnis where ISIS has been trying to deploy what could be one of its last massive strategy to stay alive in Iraq, Libya and Syria, and where the West has launched an important campaign to root out and eliminate the positions of elements of this radical extremist group, in a country already facing a threat of disintegration between a Kurdistan in the north with an important percentage of iraqi overall production, a sunni central part and a shiite southern part and where all across the country since the 2003 intervention, multiple clashes between sunni and shiite have been going on up until now, just about when Iraq has been stepping up efforts to raise its oil production, in a country which holds the 4th largest oil reserve within the OPEC.

But it looks like that all these positive efforts by Iraqi government to raise its oil production (notwithstanding many previous problems with the Kurdish Regional Government in terms of contracts and blocks offerings by kurdish authorities to foreign companies without permission from Baghdad) might find an important obstacle after the eruption of violence in Mosul and which so far has been affecting even if in a small extent some oil wells which have been burnt by ISIS militants not just in Mosul but also in Kirkuk, a larger oil producing city, this could really if not properly managed hit a blow not just to iraqi oil production but also causing an important impact to world oil prices. And because of this situation, iraqi oil authorities just pledged to OPEC for an exemption of any oil cut deal to be confirmed in November, citing the war on ISIS and the recent situation in Mosul, and after the recent rout Baghdad had with OPEC also due to mishandling of iraqi oil production data by the organisation.

Important to consider the timing of this recent resurgence of violence in Iraq after a period of relatively small stability, but stability after all, and all the linkings and connections with all the situation in Libya and Syria where ISIS has been striving to survive, and also the interests of the many foreign players involved in all the chaotic situation in the MENA region, and where the most important stake holders might seem to be Iran (a key ally of the current shiite government of Iraq) and Saudi Arabia, which is also undergoing important issues in its own soil as well as in the regional level with a war in Yemen which has been importantly draining its state funds pushing to carry out massive economic and financial reforms to prevent a financial collapse in the medium run. 

In this sense, what happens in Mosul in the next days or weeks might be determinant for the future not just for Iraq but also for the entire MENA region, and on this is important to mention an ongoing discussion forum held and sponsored by the crowdsourced consultancy firm WIKISTRAT which pursues to envision and forecast the future of Mosul and Iraq after this sudden eruption of violence and which so far has been discussing many angles and aspects of this current hotspot, showing the importance and relevance of this issue.

The war in Yemen and the threats to one strategic oil global chokepoint: Bab al Mandeb Strait

http://www.israeldefense.co.il/en/content/battle-over-bab-al-mandab-straits

Jordanians protests against natural gas deals with Israel

http://www.presstv.ir/Detail/2016/10/14/489059/Jordan-gas-deal-Israel-Amman

Yet another Gulf state facing important political turmoil over ow oil prices and fuel subsidies cuts: Kuwait

http://www.bbc.com/news/world-middle-east-37671913

Russia's probable short lived bear hug with OPEC on oil cuts

https://www.bloomberg.com/gadfly/articles/2016-10-16/russian-pledge-to-back-opec-cuts-probably-won-t-stack-up?utm_content=business&utm_campaign=socialflow-organic&utm_source=twitter&utm_medium=social&cmpid%3D=socialflow-twitter-business

Crude oil production of Oman drops in September 2016

http://timesofoman.com/article/94288

La OPEP: incertidumbre y turbulencia en la geopolitica petrolera global

Del 26 al 28 de Septiembre a se produjo una reunion de carácter consultivo entre diversos miembros del Foro Internacional de Energia que engloba a paises productores y consumidores donde toda la atención de los mercados se centro en el posible anuncio de una decision que finalmente se dio, a raíz de un entendimiento entre los dos miembros mas relevantes de la organización, Arabia Saudita e Iran, de recortar un total de 750 MBD, pero de la que aun no se han afinado detalles técnicos y se esperaría que sea en la próxima reunion ministerial ordinaria en el mes de Noviembre donde sea formalizado el anuncio y su operacionalizacion subsiguiente. 

Asi como tampoco se sabe de la voluntad de otros productores importantes no OPEP de unirse a esta intención de recorte como Rusia, Noruega, Mexico, todo lo anterior en medio de una situación de pugnas y rivalidades internas dentro la organización especialmente entre saudíes e iraníes por lograr el control e influencia religioso geopolítica en el mundo musulmán así como la turbulencia política que se encuentran viviendo cada uno de los paises miembros del bloque que controla el 40% de la producción mundial petrolera actualmente, ademas de controlar alrededor del 60% de las reservas globales de petróleo a escala global, lo que, a pesar de posiciones en contra de la organización y que afirman su irrelevancia actual a la hora de influir en el comportamiento de los precios y los mercados internacionales, aun le otorga a este organismo importancia en la dinámica de la geopolítica petrolera.

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Cuota de reservas petroleras por la OPEP para finales de 2015

Fuente: Boletin Estadistico de la OPEP 2016

Es bien sabido que la OPEP pero específicamente algunos actores tanto internos como externos han propulsado un cambio radical de su estrategia de pasar de defensa de precios justos para los miembros productores a pasar a una radical defensa y protección de "market share" o cuotas de mercados principalmente defendida por el mayor productor del bloque Arabia Saudita así como sus aliados del denominado Consejo de Cooperacion del Golfo, compuesto por las monarquías emiratos y sultanatos como Kuwait, Emiratos Arabes Unidos, Bahrein y Oman, los cuales tradicionalmente han sido cercanos a las posturas sauditas tanto en el seno de la OPEP como en la dinámica geopolítica de la region, y ademas otros paises se han unido a esta estrategia como Iran pero con la intención de recuperar su propia participación en el mercado luego de un largo periodo de sanciones que afecto notablemente su producción y sus exportaciones petroleras, postura que resulta comprensible basado en razones de interés nacional para Iran en este caso. 

En este sentido, esta estrategia de propiciar una sobre oferta petrolera con el fin de inundar los mercados internacionales desplegada desde 2014 y que sirvió como resorte para esta defensa de mercados causo un descalabro en los precios del crudo, que mas alla de haber afectado a la industria del shale oil y shale gas (petróleo y gas de esquisto) en  Estados Unidos, resulto ser contraproducente para los mismos impulsores de dicho plan, ya que es sabido que en el plano financiero y macroeconómico las cosas no andan bien para Arabia Saudita, Kuwait, Emiratos Arabes Unidos, 

Ademas otros paises afectados por este comportamiento y que ha derivado en medidas generalizadas comunes tales como: recortes de gastos públicos, recortes de subsidios al combustible automotor, jugadas inéditas (o tal vez no?) de iniciar una oferta de acciones por parte de la empresa Saudi Aramco, lanzamiento de planes para diversificación de las economías del golfo pérsico tales como el Plan Vision 2030 donde el actual principe de la corona saudi estaría apuntando a intensificar el desarrollo de la energía solar, entre otras, lo que agregaría mas incertidumbre tanto a la dinámica geopolítica de la region, así como al futuro del petróleo y gas como fuentes de recursos en el Medio Oriente y en los países de la OPEP.

Ya varios países anunciaron sus desacuerdos y desavenencias al finalizar la reunion de la OPEP en el marco del Foro Internacional de Energia, mientras que por ejemplo Nigeria anuncio que estaría exenta de esta medida, Iraq critico el uso de las fuentes secundarias por parte de la OPEP para el manejo y publicación de sus cifras de producción, ademas de otros anuncios previos por parte de Libia en relación a su negativa de unirse a un posible congelamiento o recorte de producción, a sabiendas que necesita de forma urgente levantar su industria petrolera y aumentar sus exportaciones ante la continua crisis e inestabilidad política que atraviesa este país del norte de africa, fuente importante de exportaciones a los mercados europeos conjuntamente con Argelia. 

Inmediatamente posterior al anuncio de la decision de la OPEP y como consecuencia del repunte de los precios ademas de a resiliencia que ha mostrado la producción petrolera en Estados Unidos, la firma Baker Hughes afirmo que el numero de taladros petroleros aumento, lo que proyectaría un nuevo aumento de la producción petrolera por parte de USA, lo que significaría de ser sostenida esta tendencia, que la OPEP en su defensa de cuota de mercado no precisamente estaría interesada en debilitar a la producción del shale oil, sino mas bien facilitar mas entrada de producción norteamericana en el mercado lo que a la larga significaría nuevas caídas de los precios de no producirse un recorte mayor al inicial anunciado de 750 MBD

Numero de taladros activos en Estados Unidos para la semana del 30 de septiembre de 2016

Fuente: Baker Hughes

Para ello necesitaría la OPEP de la cooperación de Rusia en este caso, ante lo cual aparentemente y basado en cifras recientes de su producción, no estaría dispuesto a unirse a este recorte, no generando suficientes esperanzas para un efecto rebote de los precios, y todo esto en medio de un panorama decreciente de la demanda global de crudo principalmente para el 2017, en momentos en que bajo el tema de la intensificación del desarrollo de energías renovables y la disminución del uso de hidrocarburos fósiles principalmente en Europa y Asia, bajo el manto de los compromisos adquiridos bajo la COP 21 de cambio climático y reducción de emisiones de carbon.

Ante todo este panorama, la OPEP se enfrenta a importantes incertidumbres y a elementos que estan atentando contra el mismo derrumbe y desaparicion de la organización, tomando en cuenta el hecho de las grandes desavenencias que existen entre miembros del organismo ya que es sabido que algunos países basan en mayor proporción sus ingresos nacionales que otros de las exportaciones petroleras lo que ha hecho dificil la coordinación y disciplina en el bloque mas alla de las declaraciones formales y el protocolo usual al finalizar cada reunion. 

Sera posible que nos acerquemos al final de esta legendaria organización mas pronto que tarde? Que actores estarían mas interesados en una perdida de relevancia de la OPEP? Rusia o Estados Unidos? Hasta que punto las rivalidades geopolíticas seguirán minando la capacidad decisoria de esta organización? Multiplicidad de preguntas cruciales que resulta necesario seguir analizando sobre el curso de los acontecimientos para tratar de encontrar respuestas sobre un tema de alta importancia geoestrategica y geopolítica en el mercado petrolero internacional. 

The OPEC Game Changer

http://www.traderplanet.com/articles/view/170219-the-opec-game-changer/

OPEC still pumping at full capacity. Will this change after November?

http://www.reuters.com/article/us-opec-oil-survey-idUSKCN1202AV