Helping America Navigate a New Energy Reality

Peak Oil Review – 14 July 2014

By on 14 Jul 2014 in Peak Oil Review

Tom Whipple, Editor

Contents
1.  Oil and the Global Economy
2.  The Middle East & North Africa
3. Russia
4.  Quote of the Week
5.  The Briefs
6. Commentary

1.  Oil and the Global Economy

Oil prices continued their three-week slide last week with New York futures falling from over $107 a barrel in mid-June to close Friday at $100.83. Brent which was trading at $115.71 a barrel in mid-June closed at $106.66. Behind the steep fall was the failure of the ISIS/Sunni offensive in Iraq to slow oil exports from the Shiite-controlled south; reports that Libyan oil production is going to resume in the near future; and ample supplies of oil products in the US.  Needless to say, whether or not the increasing chaos in Iraq will allow Iraqi oil exports to grow or remain stable is an open question.

Even a new forecast by the IEA that global demand for oil is expected to increase in 2015 to 1.4 million b/d from a 1.2 million b/d in 2014 was not enough to stabilize prices. The Agency reported that OPEC output in June remained steady with a decline in Iraqi exports of 260,000 b/d offset by increased production from Saudi Arabia, Iran, and Nigeria. The IEA also warned that there is no room for complacency about world oil supplies in the next 18 months as the Iraqi situation is highly volatile. The increase in global demand next year is expected to come mostly from China, the US, and other industrialized nations with increasing non-OPEC production – mostly US shale oil – expected to fill the increased demand. The Agency remains optimistic that rapid growth in US shale oil production will continue for at least another 18 months.

Questions are starting to appear in the press about the lack of results from the large capital expenditures the oilmajors have been making to find and develop new sources of crude. A recent story in Reuters points out that successful new oilfield development has dropped to the lowest in 15 years; that the global reserve replacement ratio is falling steeply and that the widely touted enhanced oil recovery techniques from mature fields are only a partial solution. An analyst quoted by Reuters points out the world is consuming 33 billion barrels each year and is finding 10-20 billion at most, with the largest find in 2013 being only 1 billion barrels. Not willing to broach the subject ofpeak oil, the story notes that shale oil is still doing well despite a hazy future; and that there is a lot of oil off Brazil and Angola.

Along with oil prices, US natural gas futures have plunged in the last three weeks from a high of nearly 4.90 per million BTUs in mid-June to a close of $4.14 on Friday. US natural gas production increased to 68.1 billion cu. ft. per day the week before last, the highest on record. This along with milder weather in the northern US has resulted in good progress in refilling US natural gas stockpiles. US natural gas production in June was 5.4 percent higher than last year. The lower prices, however, will increase the financial pressures on the natural gas industry which is already losing money by drilling for gas which costs more to produce than it sells for. How much longer Wall Street will continue financing this activity in hopes that natural gas prices will rise to economic levels remains to be seen.

2.  The Middle East & North Africa

Iraq:  With the chaos increasing daily, it is difficult to see just where the optimism about the future of Iraqi oil exports is based. Negotiations over the formation of a new Iraqi government broke down with the Sunnis and Kurds refusing to participate in a coalition and withdrawing from the current government. The parliament will not meet for another five weeks.  Many influential Shiites are saying that Prime Minister Maliki must go, believing that he is largely responsible for the current troubles.  The Prime Minister, however, seems unwilling to step down and there is no end to the political crisis in sight.

Fighting between government forces and the ISIS insurgents continues north of Baghdad with some 300 US advisors, an unknown number of Iranian advisors, and newly delivered Russian fighter-bombers helping the government. So far a much heralded government offensive has been unable to recapture any territory and the ISIS continues to take small towns around Baghdad. The Pentagon says the government can probably defend the capitol, but is unlikely to be able to recapture the lost territory.

Bombings and sectarian killings continue apace in Baghdad amid rumors of an imminent ISIS push on the capital. Fears are growing about the large number of Shiite militia being recruited to fight the ISIS. Many believe the government will not be able to control the militias and that the fighting will turn into a brutal, take-no-prisoners, sectarian conflict.

Taking advantage of the chaos, Kurdistan’s armed forces occupied all the oil fields and production facilities in the disputed territory around Kirkuk, telling the employees of Iraq’s northern oil company to work for them or get out. The Kurds have no way to move any oil produced in the region, so for now this oil is off the table. The Kurds are worried that Baghdad will retaliate by bombing Kurdistan which is vulnerable to the newly delivered Russian warplanes

Iraq’s oil production fell to 3.17 million b/d in June, with 2.43 million b/d being exported, after its largest refinery at Baiji was closed due to the fighting and output from the northern oilfields shut down completely. Kurdistan increased its production to 360,000 b/d last month, but can only export some 130,000 b/d by truck and pipeline until its export pipeline to Turkey is upgraded later this year.

Given the current situation, it is impossible to foresee where all this is going. With sectarian passions increasing it seems likely that Iraqi oil exports will be adversely affected before the year is out and that targets for increased production will not be met in the immediate future.

Libya: Optimism that substantial oil exports will be resumed soon seems premature. The giant El-Sharara field has been shut down for more than a year and despite the announcement that it has reopened, it may be weeks or months before substantial quantities of oil are delivered to the coast. Over the weekend the 90,000 b/d Berga oilport was closed again by yet another dispute; inter-tribal fighting closed the Tripoli International Airport; and the government announced that oil exports from the large Es Sidar and Ras Lanuf terminals which were formally opened last week have yet to restart.  With no real changes taking place in the country, it is likely that some portion of Libya’s oil exports will continue to be held hostage by one group or another for some time to come.

Iran:  Tehran’s oil exports fell in June to 1.08 million b/d, the lowest level since October with China cutting its imports in the last two months by 36 percent. As the July 20th deadline for the expiration of the interim nuclear agreement approaches, diplomatic activity has intensified. Several foreign ministers including US Secretary Kerry have come to Vienna to in an effort to break the deadlock. With Tehran still insisting on more uranium enrichment capacity than other countries believe is necessary or the Israelis will accept, it seems likely that the interim agreement will be extended and the negotiations will continue.

Tehran’s foreign relations have become considerably more complicated in recent weeks. With the collapse of much of Iraq’s armed forces and the growing strength of Sunni radicalism in the region, Tehran has some heavy burdens in defending the Assad government against the insurgency; supporting Hezbollah in Lebanon; propping up the Al-Maliki government against the ISIS threat to Baghdad; and supporting Hamas in Gaza in its growing war with Israel. On top of these issues Iran has a serious and growing water shortage. While many believe that Tehran will have to give up some its nuclear ambitions in order to regain its oil exports and free economic access to the world economy, so far there is little indication that this is happening.

Beyond all this is the threat that the Israelis will eventually strike Iran’s nuclear facilities if the negotiations collapse or appear to be going nowhere. This of course revives the specter that the Straits of Hormuz could be blocked, greatly reducing Middle Eastern oil exports.

3. Russia

For several years now outside observers have been pointing out that Russian oil production must peak someday, but production has continued to inch up steadily for the past five or six years. It now is starting to appear that the beginning of a production decline has finally arrived. For the past year Moscow has been reporting that daily oilproduction has been dropping slowly, but is still above 10 million b/d. Russia’s exports have been above 5 million b/d or half total production for the past ten years. The EIA’s export data on Russia unfortunately has not been updated since 2010 so we have no idea as to what has been happening recently.

Last week Moscow’s Finance Ministry announced that it expects a 6.3 percent drop in oil revenues by 2016 from 2014 levels because of a drop in oil production. Some of the numbers released by Moscow do not make sense, but the thrust of the report seems clear. Russia’s oil production seems to be peaking and has started to decline. As has been the case in all other exporters as they go into decline, Moscow’s oil exports can be expected to drop at a faster rate than total production.

4.  Quote of the Week

  • About oil Orwellian Newspeak: “We now have nearly an entire population in the United States and nearly an entire media establishment that believes that oil is abundant–not because of the objective facts, but because of the oil industry’s highly successful public relations campaign, a campaign that is still underway. The reason it is still underway is that it is essential to repeat the fake abundance story again and again in order to drown out any possibility that contrary facts will make their way into the public mind.”

— Kurt Cobb, author, speaker, columnist focusing on energy and the environment (7/13)

5.  The Briefs

  •  Nigeria has been listed as the country with the highest incidents of crude oil theft in the world.  According to Oilprice.com, with as much as 400,000 barrels of crude oil stolen daily, Nigeria is ranked worse than Mexico, Iraq, Russia and Indonesia among the top five countries most plagued by oil theft. The report put Nigeria’s losses to crude theft at $1.7 billion, representing 7.7 percent of Nigeria’s Gross Domestic Product, or more than the country spends on education and healthcare. (7/10)
  • In Syria, militants from the Sunni extremist group ISIS have captured Syria’s largest oil field and now hold nearly half of the northeastern province of Deir-Ezzour after months-long battles with other rebel factions, according to opposition activists, rebels and local residents. (7/9)
  • In Brazil, Maersk Oil said it would no longer pursue growth for its business and as a result has sold its ownership share in the Polvo field to the operator. The company bought stakes in three fields in Brazil for $2.4 billion in July 2011, but decided to take impairment on them following appraisal drillings that came out at the lower end of expectations as well as increased development costs and a subdued oil price. (7/9)
  • Among European nations, shale could eventually meet about 10 percent of energy demand, European Energy Commissioner Gunther Oettinger said. He said companies with reservations about hydraulic fracturing should keep all options on the table. (7/9)
  • Platt’s list of The Oil Big Five for July 2014–the big issues that are keeping the publisher’s oil experts busy around the globe—includes the following: 1) Iraq’s political unrest and its energy implications;2) US oil exports;  3) Negative refining margins in Singapore; 4) Downward crude differentials;  Abundant supply amid weak Asian and regional demand has seen numerous key grades in Africa, the Mediterranean, the North Sea and Russia hit multi-year lows; and 5) Enbridge’s Northern Gateway plan approved, with 209 conditions set by the National Energy Board. (7/9)
  • Rigs targeting oil in the US hit a record for the fifth straight week as companies ramped up drilling in shale formations across the South. Oil rigs increased by one to 1,563, the most since Baker Hughes Inc. separated its oil and gas counts in 1987. The gas count was unchanged at 311.

    Drilling rig count for June: Baker Hughes said there were an average 1,861 rigs active in the United States in June, up two from the number counted in May but up 100 from June 2013. For Canada, Baker Hughes said the average rig count for June was 240, up 78 from May and 57 more than were counted in June 2013. (7/9)

  • Crude oil production in the Permian Basin has increased to 1.35 million b/d in 2013 from 870,000 in 2007.  This increase is concentrated in six low-permeability formations: Sprayberry, Wolfcamp, Bone Spring, Glorieta, Yeso and Delaware.  Since March 2013, the Permian has become the largest crude oilproducing region in the US, with production exceeding that from the federal offshore Gulf of Mexico region. (Source: EIA)
  • The American Petroleum Institute  began a new effort to ease public fears about hydraulic fracturing after a legal setback in New York state and a voter push in Colorado to ban the drilling practice. API released guidelines for improving community relations as “fracking” extends to more towns, raising concerns about pollution risks. The document reads like an etiquette guide for producers moving into rural towns to start drilling. (7/10)
  • XL pipeline: The Supreme Court of Nebraska plans to hear arguments the first week of September in the state’s appeal of a property rights case that could block the Keystone XL pipeline. If the justices grant the appeal, which would approved the pipeline’s route through Nebraska, before the date of the elections, it could be an unwanted October surprise for President Barack Obama. (7/10)
  • For more than 30 years, the Louisiana Offshore Oil Port (LOOP) has been a symbol of U.S. dependence on foreign oil, pumping Nigerian and Saudi Arabian crude from the world’s biggest supertankers into underground storage caverns beneath the marshes of southern Louisiana. Now, with domestic production at a 28-year high, LOOP’s managers are thinking the previously unthinkable: They want to reverse the flows and send North American oil out as well as take foreign oil in. To be an outbound hub, the port needs financial commitments from shippers to build needed infrastructure. (7/10)
  • Oil shale and water: In response to a legal challenge brought by Western Resource Advocates, Chevron confirmed what oil companies denied have for years—oil shale development in the western US would use enormous quantities of water, thereby straining existing water resources.  In a court filing, Chevron acknowledged that to meet its goal of developing 500,000 b/d of shale, the company would require 120,000 acre-feet, enough water to serve more than one million people per year.  That’s the equivalent of five barrels of water per barrel of oil produced. (7/8)
  • Drought in the southwestern US will deplete the vast Lake Mead this week to levels not seen since Hoover Dam was completed and the reservoir on the Colorado River was filled in the 1930s.  Officials said water obligations will be met at least through next year without a key shortage declaration. (7/9)
  • Scientists say that a recent surge of low-magnitude earthquakes in Oklahoma is likely the result of the underground disposal of vast quantities of wastewater generated by oil and gas extraction. Temblors in Oklahoma used to be rare. Before 2008, the state experienced just one earthquake of magnitude 3 or larger each year. So far this year the state has already witnessed 230 quakes of that size. (7/9)
  • In Saudi Arabia, Royal Dutch Shell confirmed it will bow out of the Kidan natural gas development project in the Empty Quarter.  Saudi Arabia’s search for gas has become a priority as it struggles to keep pace with rising demand. Both Eni and Repsol-YPF have recently withdrawn from similar Saudi projects. (7/8)
  • Turkey is interested in exploring its shale gas potential through a possible joint venture with Exxon Mobil. The Turkish national oil and gas company TPAO, is in talks to form a joint venture with Exxon to extend to potential reserves in far western and southeast Turkey. The country has an estimated 162 trillion cubic feet of natural gas. (7/11)
  • Iran’s deputy minister for gas affairs said Wednesday he was expecting Russia to start investing in Iran’s natural gas industry specifically in building natural gas pipelines. (7/10)
  • Egypt is willing to approve a potential deal allowing BG Group to import natural gas from Israel for its local facility if the parties involved agree to help meet the country’s domestic demand at a reasonable price. (7/9)
  • A judge in Michigan has ruled that Chesapeake Energy Corp must face a criminal trial on a charge of bid-rigging with competitor Encana Corp at a 2010 state land lease auction, citing evidence of a conspiracy between the companies that drove state lease prices down sharply. (7/11)
  • Exxon Mobil is fighting criminal charges over a wastewater spill in Pennsylvania with an unusual defense, contending that the state’s attorney general improperly singled the company out in an effort to stop hydraulic fracturing. Prosecutors say Exxon subsidiary XTO Energy Inc. is criminally liable for a big leak of water that had been used in fracking in north-central Pennsylvania in 2010. The case involves the first criminal charges filed against a public company drilling in Pennsylvania’s Marcellus Shale. (7/11)
  • Coal: The US Energy Information Administration revised most of its 2014 projections for the US coal sector lower Tuesday, basing its decisions on weak electricity demand at home and oversupply in global seaborne markets. The July projection of 951 million tons for 2014 is still up 2.8% compared with 2013 consumption of 925 million. In 2015, the EIA projects US coal consumption will dip to 924.4 million tons due to retirements of coal-fired power plants, slow electricity sales growth and lower natural gas prices. (7/9)
  • In India, fuel and power companies want India’s new government to use the new budget to prove it is ready to start dismantling the system of government pricing and subsidies which has hobbled the energy industry. India’s convoluted system of taxes and fuel subsidies not only cost the country tens of billions of dollars every year, but it also discourages and delays expansion in the companies that provide fuel and power to the public. (7/10)
  • China will waive a 10 percent purchase tax on electric cars as part of expanded measures to combat pollution and cut energy dependence. New-energy autos — China’s term for electric cars, plug-in hybrids and fuel-cell vehicles — will be excluded from the levy from Sept. 1 to the end of 2017. (7/10)
  • EVs: A group of six San Francisco Bay Area cities, counties and water agencies has joined forces for the purchase of 90 all-electric vehicles with the help of a $2.8 million grant from a regional transportation agency. The vehicles will save more than $500,000 in fuel costs and about 2 million pounds of carbon dioxide emissions over five years. (7/9)
  • Wind energy: Sixteen companies are cleared to take part in an upcoming lease sale to develop wind energy on nearly 80,000 acres off the Maryland coast that goes on the auction block Aug. 19. The Department of Energy says the area up for auction has the potential to support as much as 1,450 megawatts of wind energy, which could be enough to meet the annual demands of 300,000 homes. (7/9)

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