The objective of the so-called Doha Meeting in Qatar, on April 17, between the world’s top oil producers is fairly straightforward: to agree on a collective OPEC and non-OPEC oil output freeze to January 2016 levels, in an effort to halt the nearly two-year oil price collapse. Yet, the actual scope of the agreement is way less ambiguous and far more OPEC-specific.

Amid the most dramatic quarter since the price fall (1Q2016) – i.e. prices hovering below $30/bbl to a 13-year low, a persistent supply-driven bear market, global economic growth forecasts being downgraded and a deep contango encouraging stocks to rise above 5-year average – Saudi Arabia, Venezuela, Russia and Qatar have revived a very well crafted “As-Is Agreement”. The terms of the agreement are relatively painless for the participating oil producers, which are already producing near their capacity limit and near their average forecast levels for 2016 –see Table 1. For all oil producers, excluding Saudi Arabia and Iran, announcing that they will not increase production in the near-term, confirms merely what was already known given the global squeeze on capital resources towards upstream developments. (more…)

A freeze in output would stop adding to the excess supply that has caused prices to collapse from levels above GBP 70 per barrel seen in June 2014. Oil is very rarely used for electricity generation, only about 1-2% of the times in the UK. Given that the UK electricity system is based on the merit order of electricity generators in the country – i.e. the marginal cost of producing an extra unit of electricity, by which electricity generators with progressively higher costs are dispatched as demand increases, in order to minimise prices for consumers – oil is always used as a last resort because it always has the highest cost. In such a system, when the marginal generator is used it always sets the price. Thus, when oil is used it always sets the electricity price. (more…)

Last month, I took part in a high level round table on Mexico’s energy future within the context of global climate change. The event was held as part of the visit of Prince Charles to Mexico, prior to 2015: the year of Mexico in the United Kingdom and the United Kingdom in Mexico.

The main objective of the meeting was to foster a dialogue with senior representatives of business, government and academia on how to ensure that Mexico’s recent energy reforms can be made as positive as possible in social and environmental terms. Participants at this private meeting included Deputy Ministers of the Secretariat of Energy (SENER) and the Secretariat of the Environment and Natural Resources (SEMARNAT), as well as Directors from the Federal Electricity Commission (CFE), the National Institute of Ecology and Climate Change (INECC), British Petroleum, BG-Group, McKinsey, Carbon Trust Mexico, WWF and ICLEI amongst others.

Mexico’s recent energy reforms enable for the first time since 1938 significant international investment in the Mexican energy sector. These laws open deep-water oil and shale fields to foreign investment, as well as liberalising Mexico’s electricity industry. According to President Peña Nieto the energy reforms will increase oil production from the current 2.3m barrels a day to 3m in 2018 and 3.5m in 2025. Natural gas production will also increase dramatically from 5,700 million cubic feet a day to 8,000 million in 2018 and to 10,400 million in 2025. This investment could potentially bring about significant economic progress and – if done well through the new Stabilisation and Development Oil Fund – play an important role in enabling Mexico’s ambitious renewable energy commitments to be met. The reforms also have the potential, however, to lead to a net increase in Mexico’s greenhouse gas emissions over time, and thereby put in jeopardy Mexico’s legally binding climate targets. Mexico is the first developing country to have passed a General Law on Climate Change (and second in the world after the UK) and remains a key partner of the UK in brokering a strong multilateral climate deal in Paris in 2015.

During my participation I challenged the perceived role of gas as transition fuel in Mexico, following UCL’s modelling work led by Dr Christophe McGlade and recently published by UKERC (www.ukerc.ac.uk/support/tiki-download_file.php?fileId=3716). I also shared my concerns that an over-investment in gas powered electricity generation could lead to carbon lock-in constraints to long-term climate policy aims, and that delaying action to decarbonise the energy system until after 2020s – but still striving for the same cumulative emissions reduction could prove very challenging.

As a result of this round table UCL Energy Institute is holding conversations with Mexico’s Secretariat of Energy to explore a potential energy systems modelling collaboration.