Peak Oil Review – May 9

Quote of the Week
“It’s clear that electric vehicles are the future.  A move from petrol and diesel to low-emission transport is a natural evolution, and it is our aim to encourage that switch sooner, rather than later.”
Simon Bridges, New Zealand’s Energy and Transport Minister
 
1.  Oil and the Global Economy
 
Last week saw volatile oil prices and unexpected developments that could have major consequences for the oil industry. The week started on a bearish tone with prices pulling back from weeks of steady increases. As the week wore on several unanticipated oil production outages occurred sending prices higher. At week’s end, however, both US and Brent crude were lower, the first weekly loss after four straight weeks of gains with New York futures at $44.66 a barrel and London at $43.37.
 
Among the important developments of the week was a massive wildfire in Alberta, which has forced the closure of some 1 million b/d of oil sands production. The fire slowed over the weekend, but officials in Alberta are saying that it could continue for weeks, making it impossible to tell if more of the tar sands 2.5 million b/d of production will have to be closed and for how long.
 
The fire has not directly affected any major production facilities as yet but has forced the evacuation of some 90,000 workers and their families who are either employed by or support the oil sands industry.  The loss of this much oil production over a period of months could lead to the rebalancing of the oil markets and higher prices sooner than expected. However, there are other forces in play affecting prices.
 
The economic news was not good last week with US payrolls growing less than expected and numerous stories of slowing economic growth implying that oil demand may be weaker ahead. The dollar was stronger last week reversing a 7 percent fall against a basket of currencies that has taken place since January. 
 
Another important development over the weekend was the sacking of the Saudi’s 81-year old oil minister, Ali al-Naimi, in the midst of a cabinet reshuffle. Al-Naimi was considered to be the most important figure in the oil industry for the last 20 years, and his departure may open an era of uncertainty as to the kingdom’s oil policies. The departure of al-Naimi was heralded by his failure to deliver on an agreement to freeze oil production at Doha last month when the Saudi king and his son intervened to veto a deal that did not include Tehran’s rapidly increasing oil production.
 
The failure of the Doha conference removed a major portion of speculators’ reasoning that the oil markets would be rebalanced soon and led to the weaker prices early last week as increasing oil supplies led to the realization that the bear market in oil prices may be with us for a while.
 
For much of the past week, traders ignored the disruptions and threats to the oil supply coming from Canada, Libya, Columbia, Nigeria, and Venezuela, and falling US production and focused on increasing oil and product inventories and increasing OPEC production. Some analysts are concerned that Chinese refiners, taking advantage of low crude prices, have been pumping out more gasoline and diesel than is needed in China, with the rest being dumped on the Asian markets creating an oil product glut.
 
Last week there were new reports that a shortage of storage capacity for crude and oil products is developing along the US Gulf Coast due to higher-than-necessary imports. Should the working capacity of US storage facilities be reached, this would likely lead to lower oil prices trumping unexpected outages in oil production.
 
As has been the case for months, analytic opinions are mixed as to where prices and production are going. US shale oil production and investment in offshore drilling continue to decline. The US rig count continues to drop, and more shale oil producers are going bankrupt, making it unlikely that the US financial services industry will be keen to finance a money-losing rebound in US oil production unless there is solid evidence of much higher prices ahead.
 
Iran, Iraq, and the Saudis still seem to be on course to pump out still higher quantities of oil despite the low prices. This, when coupled with slowing global demand, could be enough to keep the markets from “rebalancing” this year and continue the glut into 2017. The IEA now is saying that it will take six months to a year of higher prices to encourage increased investment in higher-cost oil projects, leaving low-cost Middle Eastern producers as the only ones that can afford to increase production in the immediate future.
 
2.  The Middle East & North Africa
 
Iraq/Syria: Baghdad’s oil exports approached a record high of 3.36 million b/d in April amongst increased turmoil in the parliament that is trying reorganize a largely corrupt and dysfunctional government. There was no progress on forming a new government last week. So far however, the oil industry has been relatively isolated from the political troubles in Baghdad and, with the help of foreign oil companies, continues to increase oil production.  How long this can continue is still up in the air. For now, there is little movement on the military, economic, or political fronts as the politicians continue to argue.
 
The fighting in Syria continues with various temporary truces coming and going. Some 20 Iranians were killed in fighting with ISIL around Aleppo. Russian, Syrian and US coalition airplanes keep bombing their targets of choice, with Moscow and Damascus focusing on the rebel threat to the Assad regime and the US and allies continuing to weaken the Islamic State.  
 
The major news of the week was the resignation of the Turkish prime minister in a power struggle with Turkish President Erdogan. The consensus is that Erdogan now has a clear path to modifying the constitution to give himself more powers. In short nothing good happened in the region last week. Some analysts are saying that the official death toll of 250,000 in the Syrian uprising should be closer to 400,000. The refugee pressure on surrounding states and the EU increases daily.
 
Libya: In a bizarre twist, a tanker carrying ”illegal” oil that had been loaded from a port in eastern Libya without the authority of the UN-backed unity government was forced to return to Libya and unload the oil as it could not find a port to unload in defiance of UN sanctions.
 
In retaliation, the eastern “government” which controls much of the oil production announced that it would no longer permit exports from the Marsa El-Hariga terminal in Tobruk without its permission. This terminal currently is processing about 120,000 b/d of Libya’s total exports of 150,000 b/d. Until this dispute is resolved, it appears as if Libya will no longer be exporting much oil. The National Oil Company in Tripoli says that storage at El-Hariga is rapidly filling and that 120,000 b/d of production will have to be halted in a week or so.
 
Iran:  Tehran says that its oil exports are back to near pre-sanctions levels. Some of this oil may be coming from the floating storage accumulated during the sanctions and not from a large increase in newly produced oil. Austrian oil company OMV has signed an agreement with the National Iranian Oil Co. and according to the Iranians, BP will open an office in Tehran this summer. These moves may be the first step in reopening EU investment in the Iranian oil industry in the wake of the nuclear agreement.
 
Iran is a relatively stable country that still has considerable cheap-to-produce oil available.  Hardliners in Tehran are still opposed to western interests making much of a profit on Iranian oil so it is doubtful there will be much new investment until this issue is resolved with the Iranian government and satisfactory terms are offered to Western oil companies. Tehran is already in talks with Fitch and Moody’s over restarting credit ratings on Iranian bonds so that money can be raised on the international market.
 
Saudi Arabia: Two weeks after announcing an ambitious program of economic reform to reduce the country’s dependence on oil, the government announced a cabinet reshuffle that replaces its oil minister for the last 20 years, Ali al-Naimi, with the current chair of Saudi Aramco, Khalid al Falih. Al Naimi had been the architect of the plan to maintain OPEC oil production in the face of falling prices, to drive high-cost oil producers from the business. This policy has resulted in still lower prices and considerable hardships for the world’s oil exporters. Little change in policy is expected as the new oil minister has been part of a team determining oil policy for many years.
 
The new minister will have responsibility for electricity and other minerals and should be in a position to better coordinate energy policy as the country moves to more solar electricity production. Domestic consumption of heavily subsidized oil has reduced Saudi Arabia’s ability to expand exports.
 
Although there are conflicting interpretations as to the meaning of the change in energy leadership, some are making the case that the Saudis are planning to increase their oil production to new highs in the coming months. As the summer months arrive, the Saudis have an overriding need for more crude to convert into electricity for air conditioning. Plentiful air conditioning is essential to keep the Saudi people content and quiet during the hot summer months. In order to avoid losing market share to Iran by diverting oil intended to export to domestic consumption, the kingdom could increase its production by another 500,000 b/d this summer.
 
Economic dislocations caused by low oil prices and government reforms have led to trouble for the giant Binladin construction firm which has laid off some 50,000 to 75,000 workers due to cuts in government contracts. This move has led to riots by company workers who say they have no received their pay in months. Seven company buses were set on fire by disgruntled employees and former employees in Mecca.
 
3.  China
 
Last year, China’s independent refiners known as teapots were granted the authority for the first time to import oil for use in their own refineries. When oil prices fell to new lows last winter, the teapots went on a buying binge which not only helped drive up oil prices but also created a logistical nightmare as more crude started arriving at Chinese ports than could be unloaded and stored or refined into marketable products.  The teapots soon refined more oil into gasoline and diesel than could be sold domestically and dumped the rest into the export markets which currently is creating an oil product glut.
 
Last week ship tracking showed 83 supertankers on the way to China carrying 166 million barrels of oil. Even though the Chinese are making an effort to expand their strategic reserve from 30 to 90 days and took full advantage of the low oil prices, this rate of imports either by the teapots or for government reserves is obviously excessive.
 
A new economic report issued last week shows that China’s manufacturing sector continues to decline, suggesting that the demand for imported oil will soon be easing. Beijing has warned its economists, analysts and business reports to stop bad mouthing the future on China’s economy and to only report optimistic news about its prospects. Topics such as the mounting debt, the housing glut, and the weakening Chinese currency are to be avoided. Commodity speculators have been another target of regulators. The government does not want speculators to drive commodity prices higher than the fundamentals would seem to warrant as this would make the closure of economic enterprises in sectors with overcapacity more difficult.
 
4. Russia
 
With strict EU sanctions on Moscow in place, nobody thought the multi-billion dollar Yamal LNG export terminal in northern Russia would ever get off the ground. Last week, however, the project’s owners confirmed that they have accumulated a substantial portion of the money necessary for the project from the Chinese. Beijing could care less about Western sanctions on Russia and see a need for ever- increasing quantities of LNG as the desperately try to reduce their use of coal.
 
A new survey shows Russian citizens pessimistic about their economic future. The survey says consumers are more pessimistic about their economic prospects than at any time in the last 11 years. Some 18 percent say they no longer have any disposable income and 70 percent do not believe the situation will improve. The ruble took its first hit in more than a month last week as oil prices stopped climbing,
 
5. Nigeria
 
Abuja is once again facing economic problems similar to those of ten years ago when the MEND insurgents were tearing up much of the country’s oil infrastructure thereby reducing oil exports. Last week insurgents blew up a Chevron Valve Platform located off the coast of Delta State. The attack and a similar one at the Forcados export terminal have reduced Nigeria’s ability to export oil until repairs can be made.
 
Exports are now thought to be at their lowest in 20 years. Even before the attack on the Chevron platform, Nigerian oil production had fallen to below 1.7 million b/d and the latest attack may have cut another 90,000 b/d. Government policy forbids oil companies from publically announcing the damage caused by insurgent attacks so it will be a while before the full impact of the recent attacks is known. Preliminary loading data from before the most recent attack shows exports falling to about 1.57 million b/d in June.
 
The lines of cars waiting for fuel eased in Abuja last week but remained in other cities. Lacking refining capacity, Nigeria must import motor fuels through a complicated system rife with corruption. Billions of dollars are missing from the state’s oil revenues accounts and last week Vice President said that $15 billion was stolen from the accounts used for the armed forces and security services. With Islamic insurgents rampaging across the north, Nigeria appears to be falling into the category of a failed state. The country normally produces more than 2 million barrels of crude a day. If current trends continue oil exports could soon be much lower.
 
6.  The Briefs
 
Deepwater doldrums: Struggling to maintain cash flow and balance sheets and facing pressure from investors for lower spending and capital discipline, operators are delaying final investment decisions, especially for costly, long-cycle projects. So far, 29 of these projects have been delayed. As a result, Wood Mackenzie estimates total reserves of 16 billion barrels of oil equivalent will be left undeveloped by 2025. (5/5)
 
Royal Dutch Shell, like its peers, saw its first-quarter profits tumble 83 percent. Shell is still not covering its high levels of CapEx and its dividend with cash flows. In the first quarter, Shell generated $4.6 billion in cash flow, but spent $6.1 billion on CapEx, and that does not take into account dividends. Excluding proceeds from asset disposals, Shell needs oil prices to trade somewhere around $70 per barrel to cover CapEx. (5/6)
 
Ten oil companies including Royal Dutch Shell, Chevron and BP are working together to develop standard production equipment, a rare cooperation among rivals to save money as low oil prices put pressure on budgets. Valves, paints, and underwater equipment are among the items that could be mass-produced at a cheaper cost. (5/6)
 
Pakistan and Iran have signed a deal under which the former will import 75,000 tons of liquefied petroleum gas within a year, months after a similar agreement was inked with Qatar. In February, Pakistan and Qatar signed a $16-billion liquefied natural gas (LNG) deal which provides imports for 16 years, throwing the authorities in energy-crisis ridden Pakistan a life-line for supplies. (5/5)
 
Bahrain: Russian state-owned oil and gas giant Gazprom is currently working out the matter of creating a liquefied natural gas (LNG) distribution hub in Bahrain. The terminal is in its construction phase and is planned to be commissioned in the first half of 2018, with construction costs amounting to $600 million. (5/3)
 
In southern India, the worst drought in decades is leaving an oil refinery parched. Mangalore Refinery & Petrochemicals Ltd. shut a crude-processing unit at its facility on Thursday because of a water shortage, leading to reduced production of fuels including gasoline and diesel. The El Nino phenomenon that’s triggered dry weather has left millions of Indians grappling with severe drought. (5/6)
 
Negative growth? As India reels from an intense drought, the World Bank has released a new report finding that perhaps the most severe impact of a changing climate could be the effect on water supplies. The report suggests that by 2050, an inadequate supply of water could knock down economic growth in some parts of the world, a figure as high as 6 percent of GDP, sending them into sustained negative growth. (5/4)
 
In Venezuela, output fell 188,000 barrels a day in the first quarter, down to 2.59 million barrels a day, making this the first time since 2008 that oil output has fallen across every region in the country.  A consultant says production is expected to remain at a lower level for the rest of the year. (5/5)
 
In Venezuela, Halliburton Co. has joined rival Schlumberger Ltd. in curbing activity in the country due to lack of payment during the oil industry’s worst financial crisis. (5/7)
 
In Mexico, the winners of acreage from the first three bidding rounds last year are moving ahead on plans to develop oil, with the first wells expected as early as fourth-quarter 2016. (5/4)
 
Canadian pipeline operator Enbridge said it had asked the country’s energy regulator for a three-year extension of the deadline to begin construction of its proposed Northern Gateway pipeline project. (5/7)
 
The US oil rig count declined by four rigs to 328 for a seventh week in a row to the lowest level since October 2009,  Baker Hughes said Friday.  Gas rigs declined by one rig to 87.  The total North American rig count 451 is down 53% from 969 one year ago, compared to the international rig count (946 today) being down 21% over the same period. (5/7; NOTE—there was an error in the Reuters report referenced here.)
 
Unconventional surpasses conventional: For decades, hydraulic fracturing had been referred to as an unconventional completion technique, but over the past ten years it has become the technique by which most natural gas is produced in the USA. Based on the most recent data, EIA estimates that natural gas production from hydraulically fractured wells now makes up about two-thirds of total U.S. marketed gas production. (5/7)
 
The US is importing more foreign crude than it has in years, becoming one of the last ports of call for many oil-producing nations despite a glut of crude from domestic companies. Oil imports this year have surged 20 percent to about eight million barrels a day since early May 2015 when they approached a 20-year low. (5/4)
 
Shifting imports: In 2015, more than 70 percent of the crude oil produced in the Lower 48 states was light oil with an API gravity above 35 degrees. At the same time, 90 percent of imported crude oil was heavier, with a gravity below 35 degrees API. To accommodate increasing U.S. production of light crude oil, refineries have adjusted their imports by reducing imports of light crudes. (5/7)
 
Price threshold: Small and medium-size oil-field-equipment companies attending an energy conference this week in Houston said oil prices need to go much higher before their corner of the industry starts seeing a meaningful recovery. Estimates from a Wall Street Journal survey of 50 equipment companies with exhibition booths at the OTC, or Offshore Technology Conference, showed an average forecast of $63 a barrel as the price that would signal the upturn is taking hold. (5/7)
 
In Alaska, the 40-year oil boom that made it one of the nation’s richest states is over. Not only have petroleum prices crashed, but Alaska’s supply of crude is running out. Thirty years ago the state was pumping 2 million b/d, a quarter of all US output. Alaska’s output has fallen to 500,000 b/d, enough to fill only one-quarter of the capacity of the Trans-Alaska Pipeline System. With 90 percent of the general fund revenue tied to oil, the collapse has been devastating. Alaska is facing a $4 billion budget deficit. The state’s rainy day fund is burning through $11 million a day. If that keeps up, it will be out of emergency funds within two years. (5/6)
 
Bankruptcy Boom: The rout in crude prices is snowballing into one of the biggest avalanches in the history of corporate America, with 59 oil and gas companies now bankrupt after this week’s filings for creditor protection by Midstates Petroleum and Ultra Petroleum. The number of US energy bankruptcies is closing in on the 68 filings seen during the depths of the telecom bust of 2002 and 2003. (5/4)
 
Chesapeake Energy, the second-largest producer of natural gas in the US, has announced plans to sell 42,000 acres of its Oklahoma shale acreage for $470 million to prop up finances and reduce a massive debt load of around $9.4 billion. Furthermore, due to low oil and gas prices, the company will seek to sell additional assets that will bring between $500 million and $1 billion into its coffers by the end of the year. (5/7)
 
EOG Resources posted a wider loss and a sharp revenue decline in the first quarter, but the oil-and-gas producer said it exceeded its goals for cost-cutting and US oil production. EOG, with a market value of more than $44 billion, is one of the nation’s top shale producers, operating in areas such as the Eagle Ford field and the Delaware Basin. EOG has said that its 2016 capital budget would be about $2.4 billion to $2.6 billion, representing a year-over-year decline of 45% to 50%. (5/6)
 
US refiners, which posted robust profits the last 18 months even as other parts of the oil business were racked by low crude prices, finally saw their roll come to a halt in the first quarter. Many refining businesses reported earnings for the period that were down roughly by half from a year earlier. (5/4)
 
Colorado’s high court found that measures passed by the cities of Fort Collins and Longmont that sought to halt the drilling technique known as fracking were preempted by state law and, therefore, invalid and unenforceable. (5/3)
 
A towering fireball from a ruptured pipeline in the most prolific shale gas region of the US has agitated energy markets and provided new fuel for critics of fracking.  On Friday, the Texas Eastern pipeline, a major artery in North America’s natural gas network, burst into flames outside Pittsburgh, Pennsylvania. The explosion seriously burned a man fleeing his house and carved a crater into the ground, authorities said. The blast occurred in the Marcellus and Utica shales, which since 2010 have grown to provide one-quarter of US natural gas production. (5/2)
 
U.S. gasoline demand rose at the fastest annual rate in almost 40 years in February as stronger economic growth, and low fuel prices spurred driving. The Energy Information Administration said late on Friday that US gasoline demand rose to 9.2 million barrels in February, up by 556,000 b/d from a year earlier and the biggest annual increase since May 1978. (5/3) [NOTE: At least one analyst says this number is too high, in part because it includes some exports.]
 
Cellulosic ethanol: During the first quarter of 2016, just over 1 million gallons of cellulosic ethanol were produced (260 b/d). Production this year is well ahead of the pace in 2015 when 2.2 million gallons of cellulosic ethanol were produced during the entire year. But we are still not near commercial production where the fuel can stand on its own and compete in the marketplace. (5/5)
 
Solar-to-grid: The US Energy Department said it has $25 million in funding to help software developers and utility providers better integrate solar power into the grid. (5/4)
 
Fusion: Last week, an independent review committee delivered a report that was supposed to show that ITER, the troubled international fusion experiment under construction in Cadarache, France, finally has a reliable construction schedule and cost estimate. But the report says only that the new date for first operations—2025, five years later than the previous official target—is the earliest possible date and could slip. (5/7)
 
New Zealand said it was taking additional steps to adopt a low-carbon economy by creating incentives to use more electric vehicles. The Energy and Transport Minister unveiled a package of incentives the government said will remove some of the barriers that inhibited the broader use of electric vehicles. According to his estimates, consumers would pay the per-gallon equivalent of 85 percent less for fuel by using electric vehicles. (5/6)
 
Sea level is rising: Ninety-nine percent of the planet’s freshwater ice is locked up in the Antarctic and Greenland ice caps. Now, a growing number of studies are raising the possibility that as those ice sheets melt, sea levels could rise by six feet this century, and far higher in the next, flooding much of the world’s populated coastal areas. (5/7)