Helping America Navigate a New Energy Reality

Peak Oil Review – 1 Aug 2016

By on 1 Aug 2016 in Peak Oil Review

Quotes of the Week

“The North America market has turned.  We expect to see a continued modest uptick in the U.S. rig count during the second half of the year.”

Dave Lesar, Halliburton CEO said two weeks ago

[Among drillers] “There is a lot of hope, but hope is not a plan. Companies keep saying we can make money at $45 oil but these companies do not put their money where their mouth is.” Below $55 a barrel, about half of U.S. oil production is “uneconomic,” according to

Fadel Gheit, an Oppenheimer & Co. energy strategist in New York

Contents
1.  Oil and the Global Economy
2.  The Middle East & North Africa
3.  China
4.  Russia
5. Nigeria
6. Venezuela
7. The Briefs

1.  Oil and the Global Economy

Oil prices fell steadily during July as the realities of oversupply trumped traders’ hopes that there would be balanced markets and higher prices later this year.  July opened with London trading just below $51 a barrel and New York around $49.50. By month’s end, London was down to $42.71 and New York to $40.74. The month’s trading was dominated by reports of increasing oil product inventories and higher OPEC production. The decline of nearly $10 a barrel naturally has had repercussions across the oil industry. For most of July, the US rig count was growing as drillers anticipated that crude prices would soon be at a level where more wells would be profitable. By month’s end, however, these hopes had been dashed, and the US oil rig count had nearly stopped growing.

During the last two years, the profits of the large integrated oil companies such as Exxon, BP, and Total have been maintained by large refining margins which offset the sharp declines in crude prices. During the last quarter, however, the growing glut in gasoline has pushed profits from refining lower. BP reported that its refining margins in the second quarter were the lowest in the last six years. All the major oil companies are facing a similar problem. This is again raising the issue of whether the large dividends that the oil industry has traditionally paid can be maintained at a time when the need for more capital expenditure is growing.

For the immediate future, most analysts are talking about further price declines with a few predicting $30 oil again. The issue of space to store excess oil is being discussed more frequently. As the summer driving and cooling season draws to a close, oil stockpiles traditionally increase. Now with both a growing oil and oil product glut, reports of more crude and oil products sitting around on tankers continue to increase. With only the OECD countries making an effort to track how much oil there is in storage, this leaves the actual storage situation in much of the world, especially Russia and China, an unknown.  If oil prices are depressed to an unexpectedly low level in the next year, the lack of storage space may be the cause.

While high-cost US shale oil production may be jumping up and down with prices and the willingness of investors to pump money into unprofitable shale oil drilling companies, production in much of the world remains strong. In low-cost conventional oil producing nations, such as in Saudi Arabia, the Gulf Arab states, Iraq, and Iran, there is determination to keep pumping to maintain market share. So much has been invested in the large and very expensive deep-sea production platforms that there is little incentive to stop work, so considerably more oil is expected to be coming from these projects in the next year or so no matter what oil is selling for.  There are at least 15 large-scale offshore projects expected to come online in the next year producing a combined 1.6 million b/d of crude. This is enough to offset outages in unstable producers and to meet anticipated increases in demand.

The financial press and the internet are rife with analysis as to what is happening to the oil markets and where they are going in the next one to five years. There is general agreement that prices will be going down and that the long-awaited “balancing” of the oil markets will not come until sometime in 2017. Beyond this, there is much uncertainty.  Many point to the roughly $370 billion cut in capital expenditures for 2016 and 2017 as the reason why prices must go higher. Wood Mackenzie believes that these cuts will result in some 7 billion fewer barrels of oil being produced through 2020 which is almost certain to push prices higher.

The counter argument is that given the fragile nature of most of the world’s major economies, higher cost oil is likely to result in rather rapid demand destruction so that substantially higher prices in the next few years may be short-lived and result in increasing economic problems.

2.  The Middle East & North Africa

Iran: In the year since the nuclear agreement was signed, Iran has made remarkable progress in restoring its oil production which is now about 3.8 million b/d with 2 million being exported. Outside of this, the economy is not recovering anywhere nearly as quickly as Tehran had hoped. The decline in oil prices means that Iran will earn about $50 billion in oil export sales as opposed to $119 billion five years ago before the embargo began and prices dropped. Lingering US sanctions on Iran for its terrorist, rather than nuclear, activities means that many foreign banks are afraid of doing business with the Iranians for fear of being heavily fined. In 2014 a French bank was fined $9 billion for doing business with Tehran in violation of the sanctions then in place. The Brexit vote has distracted London and many British banks from investment in Iran despite many opportunities.

Direct foreign investment in Iran was $4.5 billion in the first quarter in comparison to the $30-50 billion the Rouhani government had hoped to attract in 2016. The status of the contract that Iran is offering to foreign investors in its oil industry is still in flux. At last word, however, the hardliners had convinced the Ayatollah to approve a new oil contract that seems unlikely to attract serious investment into the country.

Like much of the Middle East, Iran is highly vulnerable to global warming. In July, the humidity index hit 140 degrees F along the gulf coast. In other regions mismanagement of water resources is leaving large areas uninhabitable. The real impact of climate change is still years or perhaps decades away, but likely to lead to numerous policy changes when the full impact is understood in government circles.

Syria/Iraq: The death toll in the Syrian civil war is now estimated to be 280,000, and the fighting goes on. Government forces backed by the Russian Air Force have some 320,000 trapped in Aleppo with little food and water. Further east, US-backed forces have driven ISIL from 40 percent of the key border city of Manbij. Here too another humanitarian crisis is growing as ISIL is preventing refugees from leaving the city as the presence of civilians is ISIL’s only defense against air attacks.

A rare ISIL attack against a Kurdish-controlled gas and oil field near Kirkuk has caused a few casualties, but started a major fire and cut production from the field by 175,000 b/d.  Talks are underway to break the political impasse over the oil situation around Kirkuk. Since the ISIL assault two years ago, the fields have been under control of Kurdish forces to keep them from falling into ISIL’s hands. For a while, the Kurds were exporting the oil through Turkey, but recent production has stopped due to political bickering.  Baghdad approved a plan for the Japanese to loan the money to upgrade the major oil refinery at Basra.

Baghdad is aiming to increase its oil production to 4.8 million b/d by the end of the year. It is currently negotiating with Exxon and PetroChina to increase production at the Artawi and Nahran Omar oilfields to a combined 550,000 b/d from the current 70,000. Russia’s Gazprom is making good progress in developing additional production at the Badra oilfield in eastern Iraq. Production at the field is now 2.9 million b/d with half of that number coming online this year.  Gazprom announced that production from a newly drilled well was 6,500 b/d or nearly ten times what comes from new fracked shale oil wells in the US.

Libya: On Friday, the UN-backed government in Tripoli once again announced that that deal had been concluded to open four major oil ports with a combined export capacity of 860,000 b/d. Early in the week, however, the Libyan Army, which is loyal to the other government, announced that it would fire on any unauthorized oil tankers entering the ports. On Sunday Libya’s National Oil Company announced that it welcomed the unconditional reopening of the blockaded oil ports and that it hoped to increase production by 150,000 b/d within two weeks and achieve an output of 900,000 b/d by the end of the year.  All we can do is wait and see what happens this time.

Saudi Arabia: During June, the Saudis increased their oil production to a record 10.6 million b/d, up by 280,000 b/d from May. One theory as to why the Saudis are pumping flat out suggests that with all the unrest engulfing the Middle East, the royal family fears that it may not be able to maintain itself in power for much longer. Hence they pump as fast as they can while they still have the opportunity.

Some analysts are warning that investing in the 5 percent of Saudi Aramco that the government is preparing to sell off for some $100 billion may not be a good investment. While the bankers are rushing for a piece of the $1 billion in brokerage fees that the sale might generate, some note that state-run oil companies have a mixed record as to their profitability. Is the company being run to maximize benefits for stockholders, or to maintain the royal family in power.  Buyers beware!

As part of their diversification program, the Saudis are planning to establish a shipbuilding complex along its east coast. The facility would build tankers for Saudi Aramco so that someday all Saudi crude and products would be exported on Saudi built and owned ships.

3.  China

There is much confusion as to whether China is helping or hindering an oil price recovery.  While Beijing’s growth rate has slowed considerably in recent years, until recently China’s demand for oil has been relatively strong.  With very low oil prices, the government has taken two important actions to improve its economic position; it has closed a number of older oilfields where the cost of oil production was well above world market prices. So far this year, China’s domestic output is down by 4.6 percent. Beijing also stepped up filling its strategic oil reserve to take advantage of the extremely low oil prices.  These moves clearly strengthened China’s demand for oil.

Chinese refinery production rose to a record high of 11 million b/d in June, up 3.2 percent from June 2015 and far more than the slowing Chinese economy could absorb. This resulted in a large increase in China’s oil product exports which were 38 percent higher in June than a year earlier. This, in turn, has flooded the world oil product markets and contributed to the recent decline in prices.

The only variable that seems rather solid is that China’s economy is not likely to grow much in the near future and may even contract, reducing the demand for oil.  Cuts in China’s demand already seem substantial and unlikely to continue.  At some point China will stop filling its strategic reserve tanks. For now, the net of all these variables seems to indicate that China will be reducing the pace at which it increases its demand for crude and continue to push its over-production of oil products onto the export markets.

4. Russia

Russia’s ruble has crept back down to 66 rubles to the dollar as Brent oil approaches $42 a barrel. This move has been the year’s worse losing streak. The ruble, however, traded at 80 to the dollar last winter when oil was below $30 a barrel. The relative stability of the ruble in the last few months has left Moscow relatively optimistic about the prospects for its economy in the coming year.

Russia has managed to increase Arctic oil production in recent years, shipping an average of 230,000 b/d from the Arctic coast in the 2nd quarter. The region is a top priority for future increases in Russian oil production. Moscow has introduced tax relief for companies drilling in the Arctic as a way of stimulating production.

5. Nigeria

Attacks on oil facilities continue despite government assurances that it is in negotiations with the insurgents. Oil production is now believed to be around 1.5 million b/d down from the normal 2.2 million. As usual, the government embargos news concerning the efficacy of insurgent attacks. Insurgent sabotage is frequently described as leaks in oil company releases.  Some analysts say production may be closer to 1.3 million b/d. Shell announced that it would lose about 35,000 b/d in the 3rd quarter due to sabotage and maintenance. Shell did note that new wells that have come online in the past year have increased production by some 53,000 b/d.

The government announced last week that oil revenue in May was the lowest in the past year. The $1.2 billion collected was 53 percent below the government’s budget estimate. The IMF announced last week that Nigeria’s economy would shrink by 1.8 percent this year.

6. Venezuela

The situation continues to deteriorate. The Army, now in charge of food distribution, is forcing stores to sell food at below cost. This obviously will not last for long. Rothschild & Co. is reported to be surveying the bondholders of PDVSA, Venezuela’s national oil company, to determine if they would be willing to swap $8 billion of the company’s short-term notes for those of longer maturity. Rumors abound that PDVSA may have to default on its bonds before the year is out.

The unstable economic situation in Venezuela has spread to Cuba which has long been dependent on the largess of its fellow “socialist” state. Havana has warned of coming power rationing and other shortages that are reminiscent of what happened to the island after the fall of the Soviet Union. Use of air conditioning is being curtailed, as is street lighting, and traffic in cities is noticeably lower.

7.  The Briefs

European energy companies’ lifeline during the rout in oil prices – refining and downstream – has withered but the fall in margins is hardly a surprise for European refiners, which are turning again to survival strategies honed during the tough years. Facing anemic demand growth at home, and struggling to compete with state-of-the-art new refineries in Asia and the Middle East, more than 1.9 million b/d of refining capacity closed over the past seven years. More will have to close before the dust settles. Integrated oil companies were prepping for more pain even during last year’s golden profits. (7/30)

Britain has cut rental fees by up to 90 percent in its latest tender for oil and gas licenses in the North Sea launched on Wednesday in a bid to attract companies to find new fields in the mature basin. The hunt for new oil and gas fields in the British part of the North Sea is expected to fall to the lowest in 45 years this year. (7/27)

At BP, even though results for the second quarter show yet another loss, CEO Bob Dudley said thousands of barrels of new production is coming online this year. BP said Tuesday it recorded a net $2.3 billion loss in the second quarter for its third straight quarterly slump. (7/27)

India’s government is considering launching talks to merge 13 state-held oil companies into one giant conglomerate that could rival some of the industry’s global giants. Such a new giant would be able to compete with the likes of Rosneft and BP in terms of size. (7/26)

Asian LPG flood: Last year, liquefied petroleum gas (LPG) supplied to Asia was being snapped up by petrochemical makers. Now, after a flood of US exports into the region, the market is awash with LPG and supplies are being stored in ships anchored off Singapore. Middle East supply is also high. (7/26)

In Mozambique, Exxon Mobil is in advanced negotiations with Eni SpA over acquiring a minority stake in offshore natural-gas discoveries. (7/28)

Petroleos Mexicanos added to more than three years of losses as a cash injection from the government wasn’t enough to overcome the pinch of record-low crude output, refinery upsets and a petrochemical plant explosion. (7/29)

In Canada, Suncor Energy is discussing with the Alberta government leaving some oil-sands bitumen in the ground in order to lower emissions and reduce costs. (7/29)

Canada’s gross domestic product contracted at the fastest pace in more than seven years in May as wildfires curbed Alberta oil production. The economy shrank 0.6 percent after an April expansion of 0.1 percent. (7/30)

The US oil rig count was up three this week to 374, while natural gas rigs were down two to 86, bringing the total up just one to 463. (7/30)

US crude exports jumped to their highest level on record in May, coming in at 662,000 b/d, monthly data from the US Energy Information Administration showed Friday. (7/30) [Editor’s note: no mention of the corresponding 7.9 million b/d of crude oil that the US imported during May.]

$60 oil: U.S. oil drillers, earlier this year, said they needed oil to reach $50 before resuming drilling. This week, despite higher prices and lower costs, the industry has raised the bar, signaling it will take $60 or better before meaningful production can resume. (7/29)

The default rate for leveraged loans in the energy sector could spike close to 18 percent if Templar Energy and Stallion Oilfield Services are unable to make interest payments on their debt, Fitch Ratings said. Fitch added that the companies will likely be forced to default on the loans in August. (7/29)

Deal-making in the US energy industry improved in the second quarter after five subdued quarters and activity is expected to accelerate in the second half of the year, consultant PwC said in a report on Thursday. (7/29)

ExxonMobil reported on Friday earnings of $1.7 billion for the second quarter, a 59-percent tumble on the year, amid sharply lower commodity prices, weaker refining margins and production 3 percent below estimates. (7/30)

ConocoPhillips reported a bigger-than-expected quarterly loss and cut its 2016 budget for the third time this year, from $5.7 billion to $5.5 billion, amid a crude oil slump that has lasted for two years. The company’s production dipped by 49,000 barrels of oil equivalent per day to 1.546 million due to the impact of wildfires in Canada among other things. (7/29)

Oilfield services provider Baker Hughes reported a bigger-than-expected quarterly loss, hurt by weak drilling activity and pricing, and said it did not expect a substantial recovery in North America this year. (7/29)

The oil-by-rail boom is over. Even at its height in 2014, crude-by-rail accounted for less than 2 percent of total rail. volumes rising from almost nothing in 2009 to more than one million b/d by 2014, according to the EIA. But those numbers fell after oil prices crashed and aren’t projected to recover. In April, just 430,000 barrels of oil rode the rails each day. (7/26)

Renewable energy continues to steadily move forward, with major companies investing in green energy. Global demand for solar power, driven by declining costs, changing regulations and an altered political and cultural atmosphere impacted by awareness of climate change, is likely to accelerate, despite the current glut of oil and natural gas in the market. The EIA anticipates renewable energy to account for about 25 percent of global consumption by 2040. (7/29)

Rising sea levels due to hurricanes and tidal flooding intensified by climate change will put military bases along the US East Coast and Gulf Coast at risk, according to a report released on Wednesday by the Union of Concerned Scientists. By 2050, coastal military bases will be hit by more than 10 times the number of floods than at present. (7/27)

Two tropical storm systems are being tracked by the US National Hurricane Center in Miami as they make their way across the warm waters west of Africa. One has a 50 percent chance of growing in the next five days, while the other has a 30 percent chance in the same period. (7/30)

The Briefs (July 18-23)
Worldwide gasoline affordability: A recent Bloomberg report compared gas prices in different counties to the average national paycheck to find where gas really is the most, and least, affordable. In high-wage nations, expensive gas prices are by and large affordable for the population. For example, Norway’s gasoline price of $6.53 a gallon is the third highest in the world, but its average citizen earns nearly $200 a day. This combination means that Norway’s high prices are the 10th most affordable in the world. On the other end of the spectrum, Nigeria, Africa’s leading oil producer, boasts the 7th cheapest gas prices in the world at $1.94 a gallon. But when coupled with an $8 average daily wage, Nigeria’s gas becomes the 4th least affordable in the world. The US ranks as 10th most affordability, with 1.64% of an average worker’s daily wages spent to buy gasoline. (7/22)

Schlumberger, the world’s No.1 oilfield services provider, said the oil downturn appeared to have bottomed out and it was considering rolling back pricing concessions. Schlumberger’s statement echoed smaller rival Halliburton’s comment that “deep, uneconomic pricing cuts” would have to be reversed. (7/22)

Schlumberger’s CEO Paal Kibsgaard stated the company’s quarterly loss was $2.16 billion and that 16,000 jobs were cut during the first half of 2016.  Jobs peaked at 129,000 in 2014 and have been reduced to 50,000 today.  Cheap crude had pushed a recovery in the oilfield services market out further than expected, and Kibsgaard said weakness should persist in the industry through the end of this year. (7/22)

Saudi Arabia, the world’s biggest oil exporter, regained its position as China’s top crude supplier in June, after losing out to Russia over the previous three months. (7/22)

Exxon Mobil Corp. is the leader in the clubhouse to buy Papua New Guinea-focused gas explorer InterOil Corp. for $2.5 billion after Oil Search Ltd. declined to submit a counteroffer. (7/22)

Argentina’s recoverable shale oil reserves are estimated at 27 billion barrels and hold the third largest shale gas and fourth largest shale oil reserves in the world. The Vaca Muerta Shale spans across four provinces and is almost double the size of the Eagle Ford shale. Current production from the Vaca Muerta formation is about 50,000 b/d, an amount that is expected to double by 2018. IHS Energy research indicates that the Vaca Muerta is characterized by favorable traits such as thick, high-quality, organic-rich shale, similar to the Permian Basin. (7/22)

The US oil rig count rose by 14 to 371 during the week of July 18, after 27 had already been added since the start of the month, Baker Hughes Inc. said on its website Friday July 22. Natural gas rigs declined by 1 to 88, bringing the total for oil and gas up by 15 to 462. (7/23)

US independent refiners such as Valero Energy Corp and Phillips 66 look set to post another quarter of disappointing earnings, putting the industry on track for its worst year since the U.S. shale boom began in 2011. The companies had hoped to rebound from a weak first quarter on the back of strong U.S. gasoline demand. But while U.S. motorists have taken to the highway in record numbers, refiners have been undone by record supplies of gasoline and diesel products. (7/22)

The US’s total consumption of petroleum products has been largely stagnant over the course of the last fifteen years, marked by the 20.94 million b/d high in 2007, and a low of 18.69 in 2012. This would make sense in the context of a growing population simultaneously realizing increased energy efficiency. A third factor to consider is total miles driven; the average miles traveled per vehicle began to plateau in 2004, changing an average of negative 0.06 percent between 2005 and 2012. (7/22)

US import quota? Months after the US energy industry triumphed in overturning an oil export ban, a group of independent producers wants to take policy one step further and curtail crude imports.  The Panhandle Import Reduction Initiative has begun campaigning for quotas on all foreign suppliers excluding Canada and Mexico. Its founders, Texas and New Mexico oilmen, said Saudi Arabia is trying to crush their industry and it’s time to fight back. (7/18)

Hedging hell: During the oil boom, U.S. drillers bought hedges against falling oil prices. But banks can foreclose on those contracts during bankruptcy proceedings, leaving drillers “naked”…burning cash in drilling operations with no protection against falling oil prices as they try to survive the bankruptcy process.  (7/22)

ConocoPhillips confirmed Thursday that it will lay off another 1,000 employees this year, mostly from North American energy jobs in the US and Canada.  Total job cuts since 2014 have already hit 3,400, roughly 18% of employees.  (7/22)

Offshore rig company Transocean revealed it started on a new contract for drilling in the deep waters of the U.S. Gulf of Mexico, though at a reduced day rate. (7/23)

Donald Trump’s potential energy secretary took President Obama to task for trying to “destroy” the US oil boom. Harold Hamm, a shale oil billionaire, gave a speech on Wednesday night at the GOP Convention arguing that Trump will become the first president to achieve American energy independence. But the numbers show Hamm wrong on the first point and likely wrong on the second. (7/22)

The world is on track for its hottest year on record and levels of carbon dioxide have reached new highs, further fuelling global warming, the World Meteorological Organization said on Thursday. June marked the 14th straight month of record heat for land and oceans. (7/22)

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