Quote of the Week
“[India’s] fuel demand is rising, and India’s excess capacity is very small. We all need to expand if demand sustains.”
Sanjiv Singh, director of refineries at India’s biggest processor
1. Oil and the Global Economy
2. The Middle East & North Africa
7. The Briefs
1. Oil and the Global Economy
Futures fell about $4 a barrel during the holiday-shortened US trading week closing at $45.41 in New York and $46.44 in London. Prices edged down early in the week, recovered a bit on Wednesday, and the plunged after the EIA reported that the US crude inventory had dropped by only 2.2 million barrels as opposed to the 6.7-million-barrel drop that the API came up with after their weekly survey. The weekly decline for Brent was the largest since January.
The forces moving the oil markets remain about the same as during the last few months. This time, it is a glut of oil products coupled with concerns about economic growth in Asia and Europe that is pushing prices down. Pressure for higher prices comes from the idea that the worldwide demand for oil continues to grow and that prices are much too low to maintain much less grow production. In recent months, prices have also been forced higher by unplanned production outages from fires and various forms of political unrest. For now, conventional wisdom says that oil prices will remain in the vicinity of $50 a barrel for the rest of the year, while a few outliers are talking about end of year prices anywhere from $20 to $80 a barrel. Even $80 oil would not solve the economic woes of those exporters that had become accustomed to $100+ oil.
An enhanced Bloomberg survey says that June OPEC production was up by 240,000 b/d last month offsetting the continuing drop in US shale oil production. The Saudis, Nigeria, and Libya boosted production, while Iraqi production slipped by 70,000 b/d. Iran’s output was stable at 3.5 million b/d ending a five-month spate of steady increases following the lifting of the sanctions.
The recent increase in the US rig count, which some see as premature, has prompted warnings that these increases will give the markets the impression that US oil production will soon be increasing again, thereby driving down futures prices. The major oil companies are starting to make investments in new large energy projects. There have been eight such projects this year as compared with only four last year.
Concerns are increasing about the status of the oil industry that has suffered from heavy cutbacks in the last two years. The oil service companies, which are the backbone for finding and developing new sources of oil have been badly hit by the steep decline in new drilling. They are losing experienced personnel and hemorrhaging money as many struggle to remain in business. The IEA is warning that too much of the world’s oil production is being concentrated in the volatile Middle East. Price drops in the last two years and political turmoil have curtailed production in the US, China, Brazil, Canada, Venezuela, and Africa, leaving a larger share of the export market to Russia and Middle Eastern countries.
2. The Middle East & North Africa
Iran: Other than stagnant oil production, the major story out of Tehran last week was the status of Iran’s new petroleum contracts which are supposed to bring billions of dollars of foreign investment flooding into Iran. Last week the head of the National Iranian Oil Company announced that the old, pre-sanction contracts would remain as the standard for future contracts. This suggests that the hardliners in Tehran have won the battle for the Ayatollah’s ear with the argument that foreigners should not be allowed “to steal” Iran’s oil. The new contracts that had been proposed by the moderates and now have been rejected were realistic in that they offered foreign oil companies the opportunity to make significant amounts of money by helping Iran increase its oil output.
It is now an open question as to how much foreign capital will be invested. Russian and Chinese oil companies have already expressed an interest, but these companies frequently make their investment decisions to support government foreign policies while ignoring the risks involved. Iran is a major participant in the growing Sunni vs. Shiite war in the Middle East. This and its hostility to Israel leave the country only one misstep away from revived sanctions or even involvement in a major military confrontation. Given the political risks, the international oil companies are going to have to think long and hard before handing over billions to Iran with little control.
Syria/Iraq: Fears are growing in Tehran that Russia may be willing to dump Shiite President Assad as part of a Syrian peace agreement. Should Assad go, it would likely lead to Sunni control of Syria, although just which Sunnis would end up in control is a good question. A Sunni government would likely cut off Iranian access to Hezbollah in Lebanon which would be a major setback for Iranian foreign policy. To keep the moderate government in Tehran from acquiescing in a settlement in Syria without leaving the minority Shiites in control, Iranian hardliners have begun glorifying the deaths of hundreds of Iranians now fighting in Syria. It is hoped that this action will popularize Iran’s involvement in the Syrian civil war.
The fighting in Syria continues at about the normal pace. Two Russian pilots, who were test flying a Syrian helicopter, got involved in the fighting and were shot down and killed. ISIL has responded to the increased airstrikes which have destroyed a large portion of the oil production, storage and refining capability in the territory it holds by going primitive. Oil is now being stored in pits dug in the ground and refined in the equivalent of moonshiner’s stills. Self-refining, which was prevalent in parts of the US in the early 20th century and in parts of Nigeria today, can produce useable, if not EPA-approved petroleum products.
The concerns about Syria as it relates to peak oil is not so much about its oil and gas production as it is about the possibility that the Sunni-Shiite conflict could spread across the region eventually having an impact on Middle Eastern oil exports.
As bombing by the Syrian, Iraqi, and numerous foreign governments continues to take a toll on ISIL’s military forces, the caliphate is retaliating by stepping up terror bombings in any place it can get to. As an easy to access target, Baghdad is taking the brunt of the terror as it is a city where truckloads of explosives can be detonated as opposed to Europe where a suicide vest operation is all that can be mustered. One attack in Baghdad killed over 280 and wounded hundreds. Another attack on a Shiite shrine north of Baghdad killed some 40.
The steady pace of bombing ISIL’s military forces and equipment by some of the world’s best air forces is gradually depleting its offensive capabilities. Lacking much in the way of air defenses, the only tactic it has is to bury itself among civilians in hope that these locations will not be attacked. While this strategy deters most Western nations, the Iraq, Syrian, and to some extend the Russian government, seem willing to inflict large numbers of civilian casualties to achieve their military objectives.
Libya: The chaos continues. Two weeks ago, there seemed to be an agreement to merge Libya’s recognized National Oil Company, which has been in Tripoli for decades, with the new one formed by the Eastern government. Everyone thought this was a step forward until the Eastern government demanded 40 percent of the revenues of the combined company as its price for the merger. Considering the Eastern government gets little or no oil revenue now, this is quite a demand and is likely to kill the deal.
There is much uncertainty about who is supporting which side in Libya right now. The West, including the US, are supposed to be supporting the UN’s new unity government in Tripoli while Egypt and the Gulf Arabs are supporting the Eastern government in Tobruk. The Tripoli government is seen as too Islamist for Cairo and its friends. Al Jazeera says that it has evidence that the West, including the US, is supporting General Haftar, the Eastern government’s military commander, in his attacks on the Tripoli government which is trying to destroy the Islamic State with Western help.
All this suggest that Libya remains a failed state and that it may be some time before we see its oil production back over 1 million b/d.
Saudi Arabia: Outside of suicide bombers hitting three Saudi cities, the most interesting news last week was the revival of the old issue about how much oil Saudi Arabia has left. The new interest began when a small Norwegian firm released a contentious study concluding that the US has more oil reserves than the Russians or the Saudis. Although most of the controversy had to do with how much US shale oil can be extracted, the Saudi issue has not been examined recently outside of very limited circles in the Kingdom. Next to intrigues and power struggles in the royal palaces, details of Saudi oil production are the most sacred of Saudi secrets.
The official Saudi “proven” reserve figure is currently around 266 billion barrels where it has been for the last 25 years despite the extraction of some 95 billion barrels during that time period. The last unbiased information we had on Saudi oil reserves came in 1979 when US executives of Saudi Aramco testified before Congress. Much of the uncertainty centers around “proved,” “probable,” and “possible” reserves. In the late 1970’s Aramco said proved reserves were at about 110 billion, probable at 178 and possible at 248. Which of these should be used for planning without the caveats is a political question.
In 1980 the Saudi’s became the sole owner of their national oil company and in 1982 stopped releasing detailed production data which could be used by outsiders to estimate the various types of reserves. At that time, the Saudis began reporting that their proved reserves were 170 billion barrels – which was much higher than than 110 billion the Americans had been estimating prior to the complete takeover. As this number was close to the accepted probable rather than proved reserves, many believed that the Saudis simply had adopted the probable number as their proved reserves. Bigger numbers, of course, do a lot for your prestige and influence.
Eight years later in 1988, Riyadh announced that its proved reserves were now at 260 billion barrels despite no indication of any new discoveries. This number, however, was close to the possible reserves reported in the late 1970’s. As the Saudi oil production was no longer subject to US Security and Exchange Commission rules about how a publically held company must list its oil reserves, the Saudis were free to announce anything that made them look good – and did.
Now that the Saudis have announced they will sell off some 5 percent of their oil industry to raise money, the question arises as to whether they will have to come clean on their oil reserves as these reserves will be an important part of establishing a value for the company. Some observers believe that the Saudis will get around this issue by only selling parts of the company that do not include oil reserves. Saudi Aramco has many assets, such as refineries, petrochemical plants, pipelines, port and storage facilities, etc. that it would not be difficult to come up with a package that did not involve the actual oil still in the ground.
Beijing’s demand for imported crude oil has been rather erratic of late. Although China’s crude imports were up by 39 percent over last year, there is no indication that domestic demand is increasing. Calculations of China’s apparent demand for oil show it contracting by 1.3 percent in April which was the third straight month of declining demand. Beijing took full advantage of last winter’s very low prices to buy oil for its strategic reserve. Also, China has switched from being a net importer of oil products with gasoline exports 30 percent higher than last year as new and efficient refineries reach full capacity. Beijing is doing more than its fair share to contribute to the growing global surplus of oil products.
China is getting its fair share of the environmental damage caused by excessive carbon emissions. Storm after storm has been slamming into Southern China in the last few months. In last week’s storm, some 200 were drowned, 2 million forced to move to higher ground, and the storm caused some $10 billion in economic losses. Flooding in China is an age old problem. In the 1998 flood, some 4,000 were drowned. During the last 30 years of economic boom, consideration of issues such as drainage and flood control took a back seat to economic growth as more and more land was developed. The government likes to talk about the role of its mega projects such as the Three Gorges Dam for their role in controlling floods, but as global evaporation continues to increase, the problem can only get worse.
Despite slowly increasing oil production and record exports, Moscow’s economy is in deep trouble. It now looks as if the economy will contract this year and the government is burning through the sovereign wealth funds it accumulated during the good years. As it drains its reserves, domestic borrowing is to quadruple next year to $20 billion to cover government budget shortfalls.
The free floating ruble has helped Moscow weather the drop in oil prices in that when the foreign currencies earned from oil exports were converted back into cheaper rubles, oil company revenues fell little in ruble terms. As oil prices surged this spring the ruble increased 16 percent against the dollar, getting in the way of a revival of economic growth. Exports are less competitive and corporate profits are lower with the stronger ruble.
The government is assessing a plan to eliminate the current export tax on oil and begin taxing oil production at the point of extraction. Under the current plan members of Moscow’s Eurasian Economic Union which is made up of former Soviet states such as Belarus are exempt from export taxes that are applied to other buyers of Russian crude. Some purchasers of the tax-free oil have been known to re-export Moscow’s crude at a profit. Moscow is undergoing the worst economic recession in the 16 years of the Putin Presidency and is thrashing around trying to stimulate economic growth.
Shell announced on Thursday that it had lifted force majeure on the export of Bonny Light crude after two months of repairs on an insurgent damaged pipeline. Nigeria’s oil output in June averaged 1.53 million b/d, up by 90,000 b/d from May. The rest of the news was bad with news of new attacks coming nearly every day.
As the oil companies working in Nigeria are forbidden from releasing information about insurgent attacks other than acknowledging that one took place, the status of Nigeria’s oil production is usually unclear until well after any attack. The capacity of the Shell terminal that came back into operation last week is 200,000 b/d, suggesting that Nigeria might be producing some 1.7 million b/d, but the details of the attacks later in the week are unknown. At least one pipeline attack last week, the Tebidaba-Brass line, is a major one leading to Agip’s Brass terminal.
The situation continues to spiral downwards. There is hardly any food for many. People are selling off their clothes and household goods to buy food at black market prices. Venezuela imports about 70 percent of its food and there is no longer enough money at official exchange rates for anyone but the government to pay for imports. Kimberly Clarke announced it was halting all production of paper products including toilet paper as it can no longer get materials or afford to sell at government mandated prices. Pets are being abandoned by the thousands and there is little medicine for the 31 million people living in the country.
On Sunday, the government opened the border into Columbia which has been closed since August for 12 hours and thousands streamed across to buy any available food in border towns. The government still imports subsidized food with the foreign exchange available, but an estimated 40 percent of this is smuggled into Columbia where it can be sold at a 10,000 percent profit.
The cult-like government still enjoys the support of some 30 percent of the population despite the difficulties. It is distributing food to its supporters leaving the rest to go hungry while blaming the situation on the CIA and the political opposition. Little is being said about current oil production, although Raul Castro announced on Friday that Cuba is no longer getting as much subsidized oil from Venezuela and that Cuba is reducing oil consumption by 28 percent to compensate. This is the first indication of a cutback in exports. Some 100,000 b/d or about half of Cuba’s requirements have been met by subsidized oil from Caracas.
Some are saying the situation in Venezuela, where a bond default is highly likely is a warning to the Chinese about making large loans to politically risky undeveloped countries. Beijing currently has some $86 billion loaned to African countries.
7. The Briefs
The June global oil and gas rig count is down from May, though US activity is rebounding, Baker Hughes reports. The oilfield services company published rig data from June, reporting the global count of 927 was down about 3 percent from May and 19 percent lower year-on-year. The average US rig count for June, meanwhile, was up about 2 percent from May, but down 50 percent from June 2015. (7/9)
While Scotland is confident about the wealth left in the North Sea, it’s London that holds sway over the oil and gas sector, a Cabinet secretary said. (7/8)
Royal Dutch Shell’s CEO Ben van Beurden has told investors that Britain’s decision to exit the European Union could slow its $30 billion asset sale plan, especially in the North Sea which had struggled to attract buyers for years. (7/8)
In Kazakhstan, Chevron Corp. has decided to go ahead with the $36.8 billion expansion of the Tengiz oil project. The company and its partners will spend $27.1 billion on facilities, $3.5 billion on wells and $6.2 billion for contingency and escalation. (7/5)
Gearing up? Two projects worth $45 billion announced by Chevron and BP this month show the world’s largest oil companies are regaining the confidence to make big investments, emboldened by rising crude prices and low costs that promise to trigger more expansion ahead. (7/9)
Data from Oslo-based Rystad Energy are revealing, painting a portrait of an industry that has scaled down the size of new oil projects. Intriguingly, the focus on smaller oil fields began before the plunge in oil prices, although the price crash is accelerating that trend. Spending on oil fields that hold more than 1 billion barrels of reserves rose by 12.5 percent annually between 2000 and 2014. However, spending on oil fields between 30 million and 1 billion barrels increased by 15 and 16 percent each year. (7/4)
Royal Dutch Shell has asked Saudi Aramco for up to $2 billion as part of the breakup of their giant Motiva Enterprises refining joint venture in the United States, the latest stumbling point in a partnership fraught with tension. The payment would be compensation for the Saudi company retaining a larger share of the nearly two decade-old JV. (7/5)
In India, Singh Indian Oil Corp. will spend about 400 billion rupees ($6 billion) to boost capacity by almost 30 percent in the next six years to feed the booming fuel demand in the world’s second-most populous nation. (7/4)
India’s world-class air pollution: The data show parts of the Indo-Gangetic plain — stretching across northern India from eastern Pakistan on one side to Bangladesh on the other — suffer some of the planet’s worst haze in October through January after monsoon rains end in September. (7/9)
Brazil’s Petrobras said Monday that it is putting nine small, shallow-water oil fields up for sale, part of a previously announced divestment plan meant to help the company chip away at its massive debt burden. (7/5)
Mexico’s Pemex expects to boost crude output over the next few years with a handful of joint ventures that will focus on onshore and offshore fields, a company official said, outlining areas it will seek to develop with outside producers. New production from the future joint ventures, or farm outs, is forecast to add about 400,000 barrels in new daily crude output and bring the company’s total to about 2.5 million barrels per day (bpd) in 2022. (7/8)
Canadian oil is back to market after the Alberta wildfire. Canadian oil-sands producers who are restoring production are finding U.S. refiners are doing just fine without as much crude from their northern neighbor. The US imported 2.6 million barrels a day from Canada last week, the smallest amount since May 13. (7/8)
Investments in additional oil sands production capacity in Alberta will be boosted with a WTI price hovering between $55/b and $60/b even as producers spare no effort to reduce their capital costs, executives said Wednesday. (7/7)
A Canadian Energy Research Institute survey has found that the country’s natural gas exports will continue to slide over the coming years, with their market share eaten up increasingly by US producers. (7/6)
The US oil rig count rose by 10, while natural gas lost one rig, week-on-week, bringing the total rig count increase last week to 9, for 440 rigs in play. (7/9)
US crude oil exports rose to a record 662,000 b/d in May from 591,000 in April. Canada accounted for the most US crude exports at 308,000 b/d, followed by the Netherlands at 110,000 b/d and Curacao at 67,000 b/d. Other prominent destinations were Britain at 36,000 b/d, Japan at 29,000 b/d and Italy at 23,000 b/d. The total export figure was the highest on record since at least 1920. (7/7)
Rystad Energy estimates recoverable oil in the US from existing fields, discoveries and yet undiscovered areas amounts to 264bn barrels. The figure surpasses Saudi Arabia’s 212bn and Russia’s 256bn in reserves. (7/5)
Big gas burn: A blistering start to summer is helping put US natural gas futures on course for the biggest gain in eight years. Gas has surged 18 percent this year, rebounding from a 17-year low. Drillers, burned by earlier declines, are refilling storage at half last year’s pace as extreme heat boosts the use of air conditioners, increasing gas demand from power plants. By November, supplies will probably drop below the five-year average. (7/6)
New Arctic regs: Energy companies that hunt for crude in icy Arctic waters will have to stash extra equipment nearby and take other potentially costly steps meant to prevent oil spills in the fragile, remote region under regulations the Obama administration imposed Thursday. Oil industry leaders say mandates will thwart development and that the regulations cost an estimated $2 billion over 10 years. (7/8)
Tight credit: Two years on from the beginning of the decline in oil prices, lenders continue to tighten access to finance for oil and gas drillers. Having been burned repeatedly by false starts for oil prices, big financial institutions and bond markets are taking a more cautious approach. New bond issuance for the oil and gas industry fell to its lowest level in the second quarter since the financial crisis in 2008-2009, a sign that credit markets are wary of reentering the fray. (7/8)
Another generation gap is hitting the oil industry. Already contending with a global price slump, US explorers are also grappling with the demographic hangover of the last great industry downturn in the 1980s, when scores of drillers went out of business. That rout drove a generation away from the business, leaving a shortage of workers in their late 30s to 50s today just as companies try to replace the Baby Boomers who make up much of senior management. (7/7)
Oil-field-services companies pioneered the technologies that allowed producers to unlock massive volumes of oil and gas trapped in shale-rock formations and marshal critical equipment and people to drill and pump wells from remote corners of North Dakota to platforms miles offshore. But they have borne the brunt of two years of belt-tightening in the oil patch, leaving them short on cash and manpower as prices slowly rebound. (7/7)
Chesapeake Energy has once again become the target of a lawsuit by property owners in the North Texas Barnett Shale region alleging the producer underpaid millions of dollars of royalties to them. (7/8)
American drivers’ seemingly insatiable thirst for gasoline is running into a flood of supply. Refineries across the nation are operating full-out and imports are pouring into the East Coast, boosting gasoline supplies to a record. At the same time, consumption has turned out to be less robust than thought. (7/4)
Energy-dependent US states like Alaska, Oklahoma, Louisiana and North Dakota stepped over the threshold of fiscal 2017 only to face revenue shortfalls precipitated by the two-year-old oil and gas industry rout. Some aren’t sure how they will pay for schools, health care, infrastructure and universities. (7/5)
The number of Oklahoma earthquakes has decreased in recent weeks compared with this time last year, which might reflect measures state officials took earlier this year to limit severely the volumes of oil and natural gas wastewater injected into deep disposal wells, according to the Oklahoma Geological Survey. (7/6)
Bad bolts: oil drillers and U.S. regulators are scrambling to determine why massive bolts used to connect subsea oil equipment keep failing, prompting costly shutdowns and raising safety concerns about hundreds of wells in the Gulf of Mexico. (7/9)
A new sensor developed by Lockheed Martin and Neos will be able to find the location of precious metals and fossil fuels buried under the Earth’s surface by detecting the substance’s effect on the local gravity field. World Oil’s report on the new technology, called Full Tensor Gradiometry (FTG) Plus, says the new device is 20 times more sensitive than gradiometers currently in use. (7/8)
EV’s to go big? Why are we focusing on electrifying smaller vehicles like cars and delivery trucks when electrifying really big trucks makes the most economic sense? Electricity is about ½ the cost of diesel or gasoline. This means the more fuel you burn, the more money you save. (7/9)
EV dirigible? European ultracapacitor manufacturer Skeleton Technologies will join French firm Flying Whales’ program to build a 60-ton Large Capacity Airship (LCA60T) for the global transport market. Skeleton Technologies will help design and build hybrid propulsion for the LCA60T’s electric power systems. The main advantage of the LCA60T will be its ability to transport heavy and oversized cargo of up to 60 tons either in its 75m-long hold or underslung, at speeds of 100 km/h (62 mph), with a range of several thousand kilometers per day. (7/5)
Climate digging: Legal force may be needed to compel state attorneys general and environmental groups to clarify their climate charges against Exxon Mobil, a House leader said. (7/8)
Helium value: Some independent analysts say the recently discovered helium gas in Lake Rukwa could be worth $3.5 billion. The analysts from Global Risk Insights, however, say the discovery of 54.2 billion standard cubic feet of helium could escalate land disputes and conflicts between villages and investors. (7/9)