How the Oil War between Saudi Arabia and Russia Affects their Plans for Nuclear Energy

pump jackIn the past few weeks while much of the world struggled with the deadly corona virus crisis, Saudi Arabia and Russia briefly engaged in a ruinous price and production war over oil.

The root cause of the dispute is control of market share for global oil sales for two major authoritarian nations who have bet their command and control national economies on fossil fuel revenues. The growth of U.S. oil exports from fracking in North Dakota and elsewhere has confounded the traditional controls sought by OPEC nations.

In the process of attacking their perceived market competitors, both countries realized that they had over reached and this past week came to an accommodation.  The agreement was explicitly rejected by Mexico.

The consequences of the oil price and production war is that world is awash in surplus oil being sold at a bargain basement price of $20-30/bbl. Compare this to prices in 2014 when the spot price for Saudi oil was $100/bbl.

What this means for the nuclear ambitions for Saudi Arabia domestically and Russia in terms of its export plans are that both countries will have to hit the brakes until the disease driven economic crisis turns around. That might not happen until well into 2021 or later.

With European economies crashing due to the effects of the virus crisis, it is difficult to see how countries like the Czech Republic, Romania, Poland, Estonia, and Bulgaria will move forward with their tenders for new nuclear energy capacity which would be attractive targets for Rosatom exports. The Russian practice of offering favorable financial terms, and even major elements of the financing of these export deals, may have to be put aside.

For Saudi Arabia, with plans for a tender for two full size, e.g., 1000-1400 MW, PWR type nuclear power stations, that project is simply not affordable at this time. For Russia, which is committed to building two huge power stations comprised of four 1200 MW VVER, one in Turkey and the other in Egypt, all other provisional projects now in the planning stage will likely stall out until oil prices improve over time.

Saudi Arabia’s plans for two full size units, at $4500/Kw, would come to a minimum of $9 billion and could be as high as $12.6 billion. These numbers don’t include grid and other infrastructure improvements. Headwinds facing Saudi Arabia include the stark fact that low oil prices have forced the Kingdom to run a deficit and to start using cash reserves.

Also, it has raised money with debt financing and cut subsidies to its underemployed population. The crash of oil pries could even be politically destabilizing for the Saudi government. Jamming a $9-13 billion energy project into that mix just doesn’t look like something that would get a green light from the finance ministry.

Russia is somewhat better positioned than Saudi Arabia. It has a thin candy shell of a government covering its real global role as a gas station for its customers. Unlike Saudi Arabia, Russia doesn’t provide social welfare subsidies to its population resulting in a lower deficit relative to the size of its economy.

Saudi Arabia may still dip its toes in the nuclear energy field by moving forward with its agreement to build the 100 MW SMART SMR at various locations for the purposes of providing power for water desalinization. One of long term goals of the Saudi nuclear program has been to stop burning fossil fuels, oil and gas, for domestic use so that they can be made available for export. Getting water desalinization plants off gas fired power plants would be a key step in that direction for the desert kingdom.

Russia is just getting started with its SMR program. It has focused on providing its first effort, which include re-purposing reactor designs from nuclear powered icebreakers, to Siberian outpost cities which also happen to be in the same region as some of its major oil fields. This suggests the Russians have a similar motive for building SMRs as Saudi Arabia, but in this case, its for electrical power and district heating rather than desalinization.

What About the U.S.?

U.S. energy officials and various energy-related think tanks, have raised the alarm that Russia’s aggressive nuclear energy export policies will be a long-term competitive threat to the U.S. regaining market share. That assessment is likely to remain valid, but the practical effect of the current oil glut may buy time for the U.S. to redevelop it nuclear industry.

Where problems will likely occur in the short term is with the supply chains. With many manufacturing businesses shut down by state ordered stay at home efforts, these businesses are closed and their workers are now unemployed. No one is sure what reopening the U.S. economy looks like. Medical experts say that extensive testing and having an effective anti-viral medicine and a vaccine are all key elements. None of these objectives appear, at this time, be to within the country’s grasp.

For developers of new advanced reactor designs, who need to be in their design and test facilities to create the unique and first of a kind components to build their plants, working at home only goes so far. Yes, a mechanical engineer can haul the CAD workstation home and do design work, but fabrication of prototype parts for a nuclear reactor is a hands-on process requiring many people on-site.

Firms that want to move forward may have to put in place strict controls such as taking temperatures of arriving staff each day and requiring that all staff wear masks. Even so, once an employee reports being in medical distress with the virus, the manufacturing plant or development facility has to shut down, the other staff who are potentially exposed have to go into a 14-day quarantine, and the whole place has to be deep cleaned with anti-microbiological chemicals.

There is a real risk as some individuals will be asymptomatic and yet also be carriers potentially infecting others. Their status would not be detected by temperature tests. Finally, firms may be overly cautious about letting people come back to work for hands on fabrication of parts design or to run production processes for the simple reason that reopening for business ahead of medical advice puts all the risk of doing so in their corner.

Any Light at the End of the Tunnel?

At this time there are no lights at the end of the tunnel. The major news media in the U.S. have extensively reported the confused and inadequate response of the federal government and the varieties of state-by-state efforts. Highly urbanized states like California, Illinois, and New York has taken extraordinary measures to push stay at home policies and social distancing.  States with rural populations like North Dakota and Wyoming have not done either.

The extent of U.S. unemployment remains unknown as millions of people cannot get through to state agencies to file their claims. By some estimates by the Federal Reserve Bank, the unemployment rate in the second quarter of 2020 could reach over 30% of the workforce. These numbers have not been seen since the depression era of the 1930s.

When and How Will the Economy Restart?

Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases and White House coronavirus task force member, said during an interview on CNN Sunday 4/12/20 that he doesn’t expect the economy to reopen like a “light switch.”

He did express “cautious optimism” that the curve of COVID-19 cases may have begun to flatten, CNN’s Jake Tapper asked Fauci about when he thinks the country will be ready to take steps to reopen based on the availability of testing.

Fauci responded that he views the reopening of the country as a “rolling reentry” that is “not going to be a light switch.”

“It’s going to be depending where you are in the country, the nature of the outbreak that you have already experienced, and the threat of an outbreak that you may not have experienced,”

Fauci said, before adding that it won’t be a “one size fits all” scenario due to how the severity of the outbreak differs throughout parts of the country,  and, “it could probably start, at least in some ways, maybe next month.”

Fauci hopes there are signs by the end of April that show there are elements that can be “safely and cautiously” pulled back on.

Ohio State University Video on Social Distancing

The Ohio Department of Health has a powerful message for the public: Social distancing works.

The agency posted a video illustrating a demonstration of chain reactions using ping pong balls and mouse traps to get its point across as people nationwide are urged to practice social distancing in an effort to battle the spread of COVID-19.

Readers of this list are, of course, familiar with the ping pong ball videos demonstrating a nuclear chain reaction.  In a way this is a similar physical process.

Mouse traps and ping pong balls to show powerful message: ‘Social distancing works’

In the meantime, stay home if you can.

The lives you save may be your own and those of your loved ones.

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About djysrv

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