The attack on Saudi Aramco’s oil production infrastructure accentuates the susceptibility of the world’s oil supply to sabotage. Even the billions of dollars spent on security could not guarantee that these oil facilities would be safe from, ironically, lowly drones that knocked out more than 5 percent of the global oil supply.
The result of the attack was as swift as its execution. On Monday, US crude oil prices soared $5.61per barrel, or 10.2 percent, to $60.46 barrel in electronic trading on the New York Mercantile Exchange. Brent crude, the international standard, jumped $7.84 per barrel, or 13 percent, to trade at $68.06 per barrel.
Such brazen attack also shows how fragile the global economy is. The market is now being tested on how it can deal with unexpected and costly disproportionate warfare. This also makes it imperative for the oil market to not only factor in the supply loss, but also place high-risk dividend moving forward.
The Philippines is more vulnerable. It heavily relies on imported crude oil to power its industries, the main mover of its economic growth. Demand for petroleum products was up by 1.4 percent in volume in 2018, with import bill leaping 32 percent in value amid efforts by crude oil exporters to limit output and raise prices. According to the Department of Energy, the country’s imports for petroleum products reached 168.8 million barrels last year from 166.5 million barrels in the previous year.
Crude oil accounts for the bulk of the country’s energy supply. At the moment, coal, geothermal, wind and solar energy and other alternative energy sources cannot yet approximate the role of imported oil in moving the country’s economic wheel. It would be ideal if, in the near term, these energy sources could at least halve the contribution of imported crude or the country could extract oil either offshore or onshore within its boundaries.
That the country needs to be self-sufficient in sourcing out its energy demand is an understatement. The attack on Saudi Aramco makes it clearer that we are at the mercy of these oil exporters.
Several energy projects are in the pipeline, but these are expected to be operational two to four years down the road. First Gen Corp., for instance, is negotiating with various gas suppliers and buyers, having chosen Japan’s JGC Corp. as its engineering, procurement and construction contractor for its liquefied natural gas (LNG) terminal project in Batangas City. First Gen is in talks with them for short-term supply contracts for the period 2021 to 2023.
But there’s one project that can supply the country with clean energy on short notice…if it is allowed. The LNG project of Energy World Corp. (EWC) in Pagbilao, Quezon, is almost complete. It remains dormant because it has not been permitted to tap into the existing transmission grid in the area. For years, the company has been seeking government’s help in securing approval to tap into other private firms’ existing transmission grid in the area, to no avail. The company is locked and loaded to add to the country’s energy requirement if and when it is cleared to do so, while it is building its own transmission line.
EWC Chairman Stewart Elliott said in the company’s yearly report that the plant wi ll be operational by late 2021. This only means that the company is confident that its substation currently undergoing construction is near completion. Just the same, if the company were allowed to tap into the existing transmission grid, it could readily contribute to the country’s energy needs.
According to my sources, EWC’s LNG Pagbilao’s project has been trapped in a bureaucratic quagmire or stymied by a group that may be adversely affected by its implementation.
This has effectively caused the country to miss out on a valuable project that is expected to beef up the country’s power requirement now that the Malampaya gas reserves are about to run out.
The LNG hub terminal, the
first of its kind in the Philippines, can process 3 million metric tons of LNG
per annum, which is sufficient to generate up to 3,000 MW of gas-fired power
plants, and even up to 6,000 MW of power when its second tank currently being
constructed becomes operational. The project costs over $750 million of direct
investment in the Philippines, and has created over 800 direct jobs during the
construction period.
Undoubtedly, the country must buckle up to address the long-term effects of the Aramco attack. Helima Croft, global head of commodity strategy at RBC Capital Markets, said the incident could prove a “game changer” for the dynamic in the Middle East.
“We contend that …the drone attacks on Saudi Arabia’s all-important Abqaiq processing facility (which has processing capacity of more than 7 [million barrels a day]) and the 1.5 mb/d Khurais oil field represents a game changer in the escalating Iranian regional standoff,” Croft wrote in a Saturday research report titled: “Saudi Arabia/Iran Crisis Guide Update: This is Your Wake Up Call…”
The Philippines cannot just sit idly by as the threat of escalation of hostilities between Iran and Saudi Arabia could spell doom to global markets.
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