Cover Story: ‘Too early to call’ impact on O&G

This article first appeared in The Edge Malaysia Weekly, on November 16, 2020 - November 22, 2020.
Cover Story: ‘Too early to call’ impact on O&G
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ECONOMIC and political observers are still uncertain about what kind of impact a Joe Biden administration would have on the oil and gas (O&G) sector.

At press time, the Senate tally stood at 49-48 in favour of the Grand Old Party. It is possible that the Republicans will continue to control the Senate, with Georgia being the last state to conclude vote counting for the Senate via a run-off on Jan 5.

A Republican-controlled Senate could make it harder for Biden to push through his Green New Deal (GND) — an economic plan that would see the US becoming carbon-neutral by 2035 by rolling out US$2 trillion worth of investments.

“The Green policies expected to be implemented by president-elect Biden is expected to hit the US O&G producers in terms of potential curtailment on both drilling and fracking to conform to environmental policies,” says Imran Yassin, head of research at MIDF Research.

“However, we have to recognise that there is still the possibility that the Republicans will retain control of the Senate. This is expected to curtail some of the policies of the Biden administration.

“If the Senate continues to be controlled by the Republicans, the current policies with regard to energy production may not change much and the tax incentives for shale producers are expected to continue.”

Prior to and during the 2020 presidential election, the Democratic Party campaign focused on outgoing President Donald Trump’s seeming disdain for the science on climate change and how to tackle the Covid-19 pandemic.

The GND, paying ode to Franklin D Roosevelt’s New Deal during the Great Depression, has become Biden’s central policy when it comes to rejuvenating the US economy as well as making it a greener and safer place to live in. The US$2 trillion investment plan, which the Democratic Party would like to see accelerated during Biden’s first term in the White House, is expected to create millions of jobs in the country while laying the foundation for sustainable growth.


In addition to rebuilding infrastructure in the US, the GND will make an ambitious move to generate clean electricity and reduce costs dramatically in critical clean energy technologies, including battery storage and next-generation building materials. It calls for a US$400 billion increase in federal procurement of key clean energy inputs such as batteries and electric vehicles, and accelerate R&D investments focusing on strategic areas like clean energy, transport, industrial processes and materials. However, the Biden administration will find it hard to push through these reforms if the Senate is controlled by the GOP.

The GND will eventually bring the US back in line with the Paris Agreement on Climate Change. With the world’s No 1 economy returning to the Paris accord, the goal of limiting global warming to 1.5°C by the end of the century is within reach, say observers. However, some say the growing global population means that the demand for fossil fuel will continue to increase.

“In the short term, this (GND) will affect the profitability of US oil companies but they will bounce back. After all, the world population is growing and with it, the demand for fossil fuels. Renewables simply can’t keep up,” says an O&G executive.

Apart from the GND, a Democratic president is usually more open to multilateral ties when engaging with the global community. This was seen in 44th US President Barack Obama’s approach to Iran.

Under the Obama administration, the US engaged with the permanent members of the United Nations Security Council plus Germany (P5+1) and the EU to bring Iran to the negotiating table to curtail its nuclear ambition. In 2015, the Joint Comprehensive Plan of Action (JCPOA) was agreed between the P5+1, the EU and Iran regarding the latter’s nuclear activity.

The JCPOA outlines the parameters for Iran, such as a reduction of installed centrifuges to 6,104 from 19,000 over the next 10 years, no enriched uranium above 3.67% purity for 15 years, and inspection of all its nuclear facilities. In response, the P5+1 will lift all sanctions against Iran within 4 to 12 months of the final accord, the US will remove sanctions against domestic and foreign companies from dealing with Iran and all UN resolutions related to the sanctions will be annulled.

However, this framework was scrapped by Trump in May 2018. As a result, Iran is continuing with its uranium enrichment programme and the economic sanctions imposed by the US and the EU against the Islamic republic remain in place.

Biden, who was vice-president when the JCPOA was entered into, has said that under his administration, the US will rejoin the accord as a starting point for follow-on negotiations if Iran returns to compliance with it.

A deal between the US and other world powers when it comes to Iran’s nuclear ambition could bring back two million barrels of oil per day (mbpd) into the market. Nevertheless, even if a deal is achieved, the volume from Iran will not come in immediately, says Imran.

“This may only happen 12 months down the road as Iran would need to ramp up production and the renegotiation may not be number one on the agenda for Biden early on in his presidency, given the multitude of issues [such as Covid-19 and the economic crisis].”

Another factor that could affect crude oil prices arising from the change in US leadership is the US’ relationship with Saudi Arabia, its closest ally in the Middle East and the Muslim world. While subsequent US administrations since the 1973 oil crisis have cultivated a close relationship with the Saudis, it was especially profound during Trump’s tenure as president. Following his 2016 election win, he broke the tradition of US presidents visiting neighbouring countries such as Canada or Mexico first, and went to Riyadh instead. Saudi Arabia is the world’s largest producer and exporter of crude oil.

Every US president wants an oil price that is “low enough” for the country’s consumption to grow and “high enough” for investments in oil production, especially in shale fracking, to continue. While this means Biden will continue the close relationship between the US and Saudi Arabia, observers point out that it will be cultivated through proper diplomatic channels, rather than a personal relationship.

“The US has always taken care to maintain its relationship with Saudi Arabia and the UAE. This started even before Trump’s tenure. There is no reason for Biden to change this,” says the O&G executive The Edge spoke to.

“In fact, Biden will probably try to build on Trump’s peace deals and try to strike a deal between Israel and Saudi Arabia. This will lead to stability in the Middle East and stable oil prices, probably in the US$60 per barrel range.”

All in all, the Biden administration may have a neutral to negative impact on oil prices, says Imran. This, of course, depends on the Opec+ decision on production cuts next month. But even then, it will most likely have a mild impact on oil prices even if the group decides to continue production cuts at the current rate of 7.7mbpd, he adds.

What does Biden’s GND mean for Malaysia?

The GND says the focus should be on the development and production of “Made in America” energy-efficient and energy-saving technologies.

Malaysia is the largest exporter of solar panels to the US (45% of its solar photovoltaic imports). It is unclear whether the GND will seek the local production of solar PVs.

None of the major solar PV producers in Malaysia are listed companies. They are mostly subsidiaries of companies from China and Germany with production plants here, leveraging the competitive production costs.

Under the Trump administration, the solar panel industry was the first to be slapped with tariffs in February 2018. Imported crystalline silicon cells, modules and AC/integrated modules were hit with a 30% tariff.

The Office of the US Trade Representative (USTR) also slapped a 25% import tariff on solar panels in 2019, 20% in 2020 and a scheduled 15% in 2021. However, in October, the USTR increased the tariff to 18% for 2021.

It is not known whether Biden will continue this practice or revoke it. What is clear is that he wants to bring jobs back to the US by way of producing green energy technologies in the country.

Therefore, it remains to be seen what Biden’s GND will bring, if and when he starts his tenure as the 46th president of the US. Nevertheless, the policy shift is expected to be the catalyst for the US to move towards a clean energy economy.

“Biden’s policy shifts on global climate change and the GND, with US businesses and investors embracing ESG (environmental, social and governance principles), are important catalysts for moving America faster towards a clean energy economy. This would involve an accelerated development of domestic wind and solar industries, as well as leveraging the carbon-pollution-free energy provided by existing sources like nuclear and hydropower,” says Lee Heng Guie, executive director of the Associated Chinese Chambers of Commerce and Industry of Malaysia’s Socio-Economic Research Centre.

The Trump tariffs have indeed boosted production of solar modules in the US, with manufacturers such as Hanwha Q Cells, Jinko and LG setting up solar module plants there. However, solar cell production is in the doldrums.

The tariffs have also softened solar price declines in the US, compared with the steep decline seen globally. An analysis with the Solar Energy Industries Association found that the tariffs have cost the US 62,000 jobs and US$19 billion in potential investments.

 

 

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