FT Energy Source Weekly Briefing

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By Ed Crooks: October 7, 2016

Two international agreements have dominated the week’s energy news. Both have futures that are still shrouded in uncertainty, but are important landmarks if only because countries with widely diverging interests were able to come together and sign up to a shared course of action.

One was the Paris climate accord, which this week secured support from enough countries to come into force formally next month. The UN said 73 countries and the EU, accounting for more than 55 per cent of global greenhouse gas emissions, had ratified the agreement, crossing the thresholds set when the accord was adopted last December. More of the 195 countries that agreed the deal then are expected to join it formally in the coming weeks, months and years.

What exactly “entering into force” means is complex. The foundation of the accord is contributions to greenhouse gas emissions curbs that countries have proposed for themselves, and are not legally bound to deliver. The World Resources Institute has a useful set of FAQs (scroll down), and Carbon Brief also had a good explainer.

(Making the Nationally Determined Contributions to emissions reduction non-binding was a requirement for the US at Paris, to secure the legal position of the accord against challenges because the administration could not secure support for the agreement in the Senate.)

In another global move to curb emissions, almost 200 countries signed up to the first ever international climate deal for aviation. It will mean airlines offsetting their emissions growth with investments in projects that cut carbon, such as wind and solar power generation.

The other agreement still dominating energy news is Opec’s plan to cut production, announced at the ministerial meeting in Algiers last month. The plan has continued to support crude prices, but there are still big questions over how the proposed cuts will be shared out between Opec members. Grant Smith at Bloomberg pointed out that Saudi Arabia was facing the risk of a rising cost from cutting production while rival producers ramp up.

In September, Opec members’ crude output rose again, to 33.6m barrels per day, according to Reuters. The news agency also had a poll showing that analysts were sceptical about the Algiers deal’s impact on oil prices in 2017.

Russia’s oil minister is expected to meet at least some of his Opec counterparts at the World Energy Congress in Istanbul next week, but analysts doubt he will make any clear commitment to output cuts. Argus described prospects for the meeting as “more a turkey than a delight”.

The prospect of a sustained period of lower oil prices, hit by competition from North American shale production and potentially slower demand growth because of climate policies, is a spur to economic reform in Saudi Arabia. One sign of the momentous changes under way is that Saudi Aramco, the national oil company, is preparing to give investors unprecedented access to its accounts, as it gets ready for its planned IPO in 2018. The company is planning to sell shares in its entire business, not just its refining and distribution operations as has sometimes been suggested, its chief executive told Bloomberg.

Another week, another company reporting a huge oil discovery in the US. The discovery, estimated at up to 2.4bn recoverable barrels, is certainly interesting. But there will be some daunting logistical problems to be overcome before it can be commercially produced.