Quote of the Week

“Debt has made things seem affordable by selling our energy future forward. This led to the miracle of tight oil and shale gas… The best years are behind us. The growth is done.”

Art Berman,  geologist, commenting on shale oil production in Texas

Graphic of the Week

Contents

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

1.  Oil and the Global Economy

Oil prices rose more than 3 percent last Wednesday after President Trump abandoned the Iranian nuclear deal and announced the “highest level” of sanctions against Tehran. The price surge stalled on Friday, however, after it looked likely that Europe would try to maintain the deal with Iran, which could keep that country’s crude exports on global markets. Crude futures closed the week just below multi-year highs with London at $77.12 and New York at $70.70, up 2.8  percent and 1.2 percent respectively.

The announcement of sanctions sent off a storm of speculation as to how much higher oil prices will move in the coming months.  Even though the US is already asking importers of large amounts of Iranian oil, such as China and South Korea, to cut their imports, this seems unlikely to happen. Even with some reluctant help by US allies, most observers are saying that at best all unilateral US sanctions could do would be to cut Iran’s exports by 500,000 b/d.

The US Energy Information Administration said last Tuesday that US crude oil production is expected to rise more than previously expected to 12 million b/d by the fourth quarter of 2019. The new forecast says US crude oil output will rise by 1.14 million b/d to an average of 11.86 million next year.

Fatih Birol, Executive Director of the International Energy Agency, said last week that the oil market is currently driven by fundamentals. There has been very strong demand growth in 2017 and so far in 2018, plus a significant drop in Venezuela’s oil production. Coupled with geopolitical developments, prices could move higher in coming months. Goldman’s is forecasting that oil prices will hit $82.50 this summer and Deutsche Bank is talking about $85-90 oil next year. Bank of America says global demand growth, falling inventories, and geopolitical issues could push oil prices to as high as $100 a barrel in 2019.

Gasoline prices are at their highest in years, up over 21 percent in the last year.  Retail prices are expected to reach $3 for regular in many more states in coming weeks. With most analysts projecting crude oil demand to outpace supply for the remainder of the year, more price gains could be coming. Higher gas prices are on track to cost Americans an extra $38 billion in 2018, wiping out about one-third of the direct benefit from the new tax law.

The OPEC Production Cut:  There is no agreement on just how the US decision on the Iranian nuclear agreement might affect the OPEC production cut. Estimates of how much the US sanctions will hurt Tehran’s exports range from essentially nothing to a high of 1 million b/d. As nobody other than the US seems interested in slowing Iranian exports, the issue may turn out to be moot.

Of more significance is the ongoing collapse of Venezuelan oil production which seems on course to drop more than the expected 500,000 b/d this year.  If Caracas’ production should fall well below 1 million b/d later this year, the global oil balance will become very tight and prices are likely to rise significantly. This situation could prompt the OPEC+ alliance to start lifting the production caps out of fear that prices could spike to the point where demand destruction would set in. This could happen no matter how much Iran is forced to cut oil shipments due to the US sanctions.

US Shale Oil Production:  US oil output continues to break records with production in the lower 48 states jumping to 10.703 million in the last week in April. The Texas Railroad Commission, which regulates the state’s oil and gas industry, issued 1,221 original drilling permits in April, up 34 percent from last year.  Drillers added 10 active oil rigs and 3 active gas rigs last week The oil and gas rig count now stands at 1,045—up 160 from this time last year. However, Canada lost seven rigs for the week suggesting that it is more productive to drill in Texas.

The future of US oil, and indeed much of the additional oil output for the entire world, is predicated on what happens to production from the Permian Basin.  The EIA expects US production will be close to 12 million b/d by the end of next year.

A growing share of Permian crude oil gets stranded due to bottlenecks shipping the oil to the Gulf Coast refineries and export terminals. The pipeline capacity out of the Permian region has become so tight that the spot price of Midland, Texas, crude was trading early last week at a discount of nearly $16 a barrel to prices in Houston. This discount is now large enough to cover the cost of sending crude to the coast by rail, as this typically costs only $6 to $8 a barrel.

Energy Transfer Partners announced last Thursday that they plan to build a crude pipeline from the Permian Basin to the Houston Ship Channel and Nederland, Texas, which will have an initial capacity of up to 600,000 b/d. The pipeline will be “easily expandable” to 1 million b/d. This project will likely take two or more years to complete; however, other pipelines are due to be completed sooner. From the amount of investment being sunk in pipelines to the Gulf Coast, it is clear the industry expects that large amounts of crude will be produced from the Permian for many years to come.

In contrast to the increasing production and optimistic productions that enough oil will be coming from the Permian Basin, Art Berman, a Texas geologist, gave a pessimistic presentation to the Texas Energy Council’s 30th Annual Symposium last week. For years, Berman has been skeptical about estimates that the Permian will still be producing prodigious amounts of crude 30 years from now. He was described by Bloomberg as “shale’s public enemy No. 1” in its story about the talk.

Berman makes the case that, despite increasing production from the Permian, its estimated reserves are only enough to last until 2022. ­­ Using similar analysis, Berman concludes there is only enough oil at Eagle Ford to last another seven years. “The reserves are respectable but they ain’t great and ain’t going to save the world.”

In reporting the story, Bloomberg said, “Berman’s grim outlook, based on analyses of reserves and production data from more than a dozen prominent shale drillers, flies in the face of predictions from the US Energy Department, Chevron, and others that the Permian is becoming one of the dominant forces in global crude markets.”

In this presentation and the press report is the crux of the peak oil story today. Either Berman is right, and serious problems are coming in the next few years, or the EIA, IEA, and the industry is correct and there will not be a serious problem with the US and global oil supply for at least two decades. Until some sort of undeniable trend sets in, there is little to do but wait warily.

2.  The Middle East & North Africa

Iran: Oil prices hit 3-year highs last week due to expectations that renewed US economic sanctions would restrict Iran’s oil supply and increase regional tensions. However, estimates are all over the map as to how successful new US sanctions will be in restricting Iranian oil exports and reigning in what Washington considers to be Iran’s aggressive foreign policy. Some believe the drop in Iran’s oil exports could rival the 1 million b/d drop in exports seen during the last embargo, while others say any decline will be insignificant.

China and Russia likely will do everything possible to maintain Iran’s exports. Beijing is already the largest purchaser of Tehran’s oil and could step up its imports if necessary. Moscow has talked about bartering and oil swaps for Iranian oil to avoid US financial sanctions.  The US’s allies in the EU and the Far East are unhappy with Washington’s actions and are likely to keep up pressure for relief from US sanctions which could do more harm to their economies than to Iran.

President Rouhani said last Tuesday that Iran would remain committed to a multinational nuclear deal. He reiterated on Sunday that his government would remain committed to its 2015 nuclear deal: “If the remaining five countries – Britain, China, France, Germany, and Russia – continue to abide by the agreement and can ensure it is protected from sanctions against key sectors of Iran’s economy, we will remain in the deal.” The US sanctions have a 180-day period during which buyers should “wind down” oil purchases, meaning any loss of supply will not be immediately felt – and companies don’t have to rush to find alternatives.

Rouhani, however, may not have an easy time in the months ahead. Iran’s economy is not doing well despite higher oil prices. The President has been the recipient of much criticism from hardliners in Tehran who believe the nuclear agreement was a mistake. On top of this, renewed skirmishing between Iran and Israel in Syria resulted in heavy Israeli air raids on Iranian military installations supporting the Assad government.  All this raises the possibility that the sanctions issue may be overtaken by other events in coming months.

Thus Washington’s abandonment of the nuclear agreement seems likely to result in a continuing series of disagreements between the US and some of its closest allies.  South Korea already said it would seek US exemptions to buy Iranian oil, and many other purchasers of Iranian oil such as India and Italy are likely to follow.

Iraq:  Over the weekend Iraq held its first parliamentary elections since the defeat of ISIS last year. While the results will be known this week, negotiations over the formation of a new government are expected to drag on as no single alliance is expected to able to win the 165 seats required for an outright majority.  The bloc that wins the most seats will have to rely on the support of smaller groups to achieve a majority.

Sources in the international oil companies working in Iraq say a new government could delay project approvals. Plans for expanding the country’s oil production capacity could also be affected, including the South Integrated Project managed by Exxon and PetroChina, which would be instrumental in allowing Iraq to boost production to 8 million b/d in the future. Refinery construction and export capacity expansion could also see delays or changes if a new government takes over.

Baghdad has signed an agreement with BP that would triple the oil production from the Kirkuk oil fields in northern Iraq to more than 1 million b/d.  The oilfields around Kirkuk were returned to federal government management last October after the Iraqi army seized the fields from the Kurds following an independence referendum in Kurdistan.

Russia’s Lukoil signed a development plan for the West Qurna-2 oil field last week aimed at doubling production from the field to 800,000 b/d by 2025.

Saudi Arabia:  Riyadh will not act unilaterally to increase oil supplies following renewed US sanctions on Iran’s energy industry.  Any rise in output is to be coordinated with Russia and other producers.  Khalid al-Falih, the kingdom’s energy minister, said Saudi Arabia would “work closely” with big OPEC countries and those outside the cartel to “mitigate the effects of any supply shortages.”  The Saudis are no longer interested in taking sole responsibility in managing the global oil market and remain committed to the OPEC+ deal.

With oil prices rising rapidly, the Saudis economic prospects should be improving.  However, the kingdom still has a big budget deficit and lots of expenses.  The IMF says the Saudis still need $88 oil before its budget is balanced again.

The war in Yemen rolls on with the Iranian-backed Houthis firing missiles at Riyadh and an oil facility in southern Saudi Arabia close to the Yemen border. The Yemeni rebels have been firing missiles into Saudi Arabia for the past three years, but they have caused little damage, and many of those missiles have been intercepted by the Saudi military. The New York Times reports that a team of US special forces are inside Yemen, helping the Saudis locate and destroy caches of ballistic missiles and their launch sites.

Saudi Energy Minister al-Falih said last week he was concerned about possible shortages of spare crude oil productive capacity.  Spare capacity will be among the topics discussed when OPEC and non-OPEC energy and oil ministers meet next month in Vienna, the minister said.

In contrast to a May 4 report in The Wall Street Journal that Riyadh wants to oil to hit at least $80 a barrel this year, al-Falih said Saudi Arabia is not targeting a specific price for oil. He said that Saudi Arabia’s objective all along has been to “bring stability, rebalancing, and equilibrium back to the oil markets.”

3. Russia

President Putin began his fourth term last Monday with a new weapon in his fight against Western sanctions: higher oil prices. With oil at its highest since 2014, much-needed money is pouring into government coffers giving the Russian government extra room to maneuver amid growing tensions with the West and protests at home.

Moscow has exported less crude oil to Europe this year as the quality of the fuel offered for sale has deteriorated and worsening diplomatic relations with Europe caused Russia to send more oil to China.  Pipeline exports to China increased by almost 50 percent in January-April from a year earlier to 12.4 million tons, according to a spokesman for the Transneft oil pipeline monopoly.

Despite worsening political relations, European countries continue to buy increased amounts of Russian gas. Gazprom is boosting production and exports and is obtaining approvals in individual countries for its Nord Stream 2 gas pipeline that has divided the EU over fears of a tightening Russian grip on gas supplies.  Moscow already supplies around one-third of Europe’s gas and due to very cold weather this past winter continues to ship higher volumes as gas importing countries replenish gas storage supplies that had been drained amid the cold snaps.  Gazprom deliveries to Europe reached an all-time high in March, and gas deliveries to European countries continued to grow in April, even after the winter heating season ended.

Norway had to cope with an unplanned outage at the Skarv gas field and Kollsnes processing plant in April. In the south, Libyan gas flow from the Greenstream pipeline to Italy was halted on April 2 due to maintenance, but the resumption of gas supplies was postponed several times, so Italy received no gas from Greenstream for the whole month of April.

On May 3, Germany became the first EU country to begin building its portion of Nord Stream Two at the Baltic Sea port of Lubmin. The construction started before Sweden and Finland signed off on the pipeline running through their waters, so the work was an affront to both the European Commission and European Parliament. Both of these bodies oppose the project which would increase the EU’s dependence on Russian gas and deprive Ukraine of the transmission fees.

4. Nigeria

Nigeria’s oil production increased to 2.07 million b/d in April after it slipped to 2.02 million b/d in March.  Industry officials attributed the drop in March to “pockets of illegal tapping into pipelines in the delta.”  Ministry figures showed that oil production including condensates averaged 2,069,784 b/d in April, about 11 percent higher than 1.85 million b/d produced in April of last year.  Oil production has been increasing following the lull in militancy in the country’s main oil-producing Niger Delta region.

Hopes of reducing importation of petroleum products has been rekindled by assurances from the Nigerian National Petroleum Corporation that the nation will achieve at least 90 percent refining capacity by the end of next year.  The corporation says, “we are in talks with the original builders of the refineries to return them to at least 90 percent capacity utilization before the 2019 deadline”. The government has been trying to get Nigeria to transform from being a net exporter of crude to being a net exporter of petroleum products. We have heard this story for several years, but now with higher oil prices, the country may be able to afford the foreign expertise it needs to refurbish its refineries.

Nigeria’s refineries have been operating far below their combined capacity of 445,000 b/d due to years of neglect, as well as theft from pipelines and sabotage, thus forcing the country to import nearly all the fuel it consumes.

6. Venezuela

Every week the country draws nearer to the day when it will no longer be exporting crude oil to the world markets. Two weeks ago Conoco began legal actions in the Caribbean to enforce a $2 billion arbitration award by the International Chamber of Commerce over the 2007 nationalization of its projects in Venezuela.  The legal action has disrupted fuel deliveries throughout the Caribbean, as Conoco attempts to seize PDVSA assets such as the tankers which move oil to refineries.  The processing, storage, and blending assets that Conoco is eyeing are located on three Caribbean islands—Curacao, Bonaire, and St. Eustatius—and account for about a quarter of PDVSA’s annual oil exports. The 335,000 b/d Isla refinery in Curacao has not received new shipments from PDVSA for two weeks and will be shutting down soon.

PDVSA has told customers they must send their own ships to pick up oil cargoes in Venezuelan waters, rather than wait for the company to deliver the oil. That keeps PDVSA’s ships out of Conoco’s grasp. The country’s oil ports are snarled with vessels waiting to load for exports.  On Thursday Venezuela rejected Conoco’s efforts to seize the country’s foreign assets to collect on the $2 billion arbitration award, but in a sign the pressure might be working, Caracas also suggested it was ready to pay the judgment.

“Petrocaribe” was a mechanism created in 2004 to promote energy cooperation and integration between Venezuela and numerous states in the Caribbean basin. Venezuela supplied the Petrocaribe member states with daily shipments of oil and products (around 300,000 b/d) offering payment facilities and discounts, with the ultimate goal of displacing the US and European oil companies throughout the region. This worked well as long as Venezuela could afford it, but as PDVSA nears collapse and is unable to supply cut-rate oil to the member states, the organization is coming apart.

If PDVSA has to lower exports over fears of asset seizure, oil storage will fill up “in a matter of days,” as PDVSA cannot afford the cost of floating storage.  Attorneys for Conoco say that from their point of view, the asset seizures are less about gaining compensation from the sale of the facilities themselves and more about putting the squeeze on PDVSA in order to pressure the company into paying Conoco the money awarded from arbitration.

7.  The Briefs (date of the article in Peak Oil News is in parentheses)

The offshore sector will increasingly focus on natural gas instead of oil over the next few decades, while policy support and technology improvements could also see offshore investment shift in favor of wind power. However, in the short run, offshore drilling is set for a resurgence. The oil market downturn in 2014 hit offshore drilling hard. Today, a quarter of the world’s oil supply comes from offshore at about 26-27 million b/d, a figure that has remained steady over the past decade, which translates into a declining share of the overall market as total supply continues to grow.

But offshore costs have declined significantly over the past four years, so much so that the industry is starting to step up spending once again. Whereas a typical offshore project in the North Sea or in the US Gulf of Mexico had a breakeven price between $60 and $80 per barrel prior to 2014, these days those costs have plunged to $25 to $40 per barrel, according to the IEA. An estimated 100 offshore projects could receive a greenlight this year, according to Rystad Energy, up from just 60 last year and 40 in 2016. Oil companies are going to shift away from shallow water drilling, which tends to be mature, and move into deeper waters. (5/7)

Oil companies are now turning to robots and drones to perform dangerous tasks in harsh offshore environments. Those gadgets save costs and improve performance, and improve safety by reducing the exposure of people to dangerous tasks and situations. (5/7)

European gas and LNG stocks were drawn down to record low levels at the end of the winter on freezing temperatures, leading to an expectation that LNG supplies would rise over the summer to help refill the depleted stocks.  US LNG from the Cheniere-operated Sabine Pass terminal and the newly operational Cove Point facility were seen as likely candidates to help Europe recover its stock levels in time for next winter. (5/12)

In Poland last year, the share of its oil imports from Russia dropped to 76 percent compared to 96 percent back in 2012. Yet its bid for energy independence came at higher import costs for Poland, because Russian oil prices averaged $59.70 a barrel in December 2017, compared to $60.20 per barrel for oil from Kazakhstan and $65.60 per barrel for US oil. (5/10)

Saudi Arabia would supply Sudan’s energy needs for five years on credit under an agreement being discussed by both governments. The deal would provide about 1.8 million tons of oil a year to Sudan, which in recent months has been hit by a sharp foreign currency crisis and an acute fuel shortage that has forced people to queue at gas stations for hours. (5/8)

In Qatar, despite an ongoing blockade by its neighbors, the state oil and gas company plans to increase its daily production capacity to 6.5 million b/d of oil equivalent in eight years from the current 4.8 million b/d. (5/9)

Algeria plans to raise its budget expenditure by 6 percent this year to capitalize on the higher oil prices ahead of presidential elections next year, but economists warn that boosting spending would mean that the North African OPEC member would need even higher oil prices to balance its budget. (5/8)

Offshore Angola, Italian energy company Eni said it reached a production plateau of 24,000 b/d at its Ochigufu field less than two months after operations began. This allows for Eni’s operated production from the regional block to hold steady at more than 150,000 b/d. (5/10)

In Canada, Shell has closed an underwriting agreement with a group of investment banks for the sale of its 8-percent interest in Canadian Natural Resources for about $3.3 billion, the company said today. The sale is part of a $30-billion divestment program that Shell approved after its acquisition of BG Group that made it a leading player in natural gas but cost it more than $50 billion and swelled its debt burden. (5/9)

In Alaska, residents should review a draft climate plan that balances the need for oil and gas revenue against environmental issues. Alaska Gov. Bill Walker and Lt. Gov. Byron Mallot published a draft climate policy that states developing oil and gas resources can be part of a responsible and diverse economic plan. (5/11)

Alaska LNG:  The Alaskan division of British supermajor BP reached a natural gas sales agreement with the Alaska Gasoline Development Corp. for a product from the North Slope. The project includes an 807-mile pipeline across Alaska. (5/9)

California lawmakers reached out to major automobile manufacturers to counter federal efforts to weaken fuel economy standards. California was authorized to implement its own rules and dozens of states have adopted those standards. After the EPA’s proposal to roll back higher MPG standards, California and a coalition of more than a dozen other states and the District of Columbia sued in an effort to prevent the rollback. (5/10)

CA MPG showdown: The leaders of the world’s biggest car companies arrived at the White House on Friday, and it may be their last chance to stop the Trump administration from a head-on collision with California. The Trump administration wants to dramatically cut back on Obama-era emissions regulations, which are supported by California and other states. But while the president and his senior advisers have signaled willingness to confront the resistance from California and its allies, they are also frustrated by what they describe as tepid support from car makers for the administration’s initiative to roll back rules. (5/11)

Biofuels change coming: The Trump administration will propose sweeping changes to the nation’s biofuel policy, including expanding it to exports and cutting the number of waivers for small refineries. It has become a battleground for entrenched corn and oil interests, one that President Donald Trump has waded into in recent months. (5/12)

Biofuels: US President Donald Trump is considering allowing exported ethanol and other biofuels to count towards the annual volumes mandated by the EPA.  The president also backed off plans to put a price cap on compliance credits refiners must submit to the EPA and supports lifting restrictions on the sales of higher ethanol blends of gasoline. (5/9)

CO2 study cut: President Donald Trump’s administration has quietly axed NASA’s monitoring system for greenhouse gases. Science magazine reports that this loss jeopardizes the ability to measure national emission cuts – as agreed to by nations in the Paris climate deal. The US plans to withdraw from the deal. However, until a pullout is formalized in 2020, the US continues to be part of the international climate accord. (5/11)

New US generation mix: EIA expects about 21 GW of natural gas-fired generators will come online in 2018. If this happens according to their reported timelines, 2018 will be the first year since 2013 in which renewables did not make up a majority of added capacity. In 2017, renewables accounted for 55% of the 21 GW of US capacity additions. (5/8)

Japan’s coal push: As the developed world moves farther and farther away from coal-fired energy, one major economy is breaking the trend.  Japan, in a move that few could have foreseen, has opened at least eight new coal-burning power plants in the last two years and has plans for at least 36 more in the next ten. This move directly contradicts a previous directive to cut back coal usage to just 10 percent of total electricity. One major reason for the turnaround in policy is the 2011 meltdown at the Fukushima Daiichi Nuclear Power Station. (5/8)

“Exported emissions”: Maryland has analyzed the emissions of every coal-fired power plant east of the Mississippi River and identified 36 in five states as top contributors to Maryland’s smog-producing ozone. (5/8)

RE jobs: Oil, natural gas, and coal may still be the dominant fuel sources in the world’s energy mix, but renewable energy is growing and creating more and more jobs worldwide. In 2017, employment in renewable energy globally topped 10 million jobs for the first time ever, the International Renewable Energy Agency (IRENA) said. (5/10)

Asia’s RE market: The International Renewable Energy Agency estimates that 60 percent of all renewable energy jobs are in the Asian economies. For the solar panel industry, China has about 60 percent of the payroll, representing about 2.2 million employees. China also accounts for 44 percent of the payroll in the wind energy industry. (5/9)

Battery storage R&D: When Secretary of Energy Rick Perry announced US$30 million in funding for energy storage projects at the beginning of this month, he drew praise from renewable energy-focused media as the latest indication that energy storage is so important and attractive that even fossil fuel-friendly Washington is throwing its weight behind it.  (5/11)

Better battery? A team of scientists from Stanford says they may have come up with the Holy Grail: a battery that is simultaneously energy dense, cheap, and durable. An important bonus is that the battery is easily scalable. The battery uses manganese as the electrolyte in a water-based solution. When the battery charges, electrolysis breaks down the water from the solution into hydrogen and oxygen. (5/7)

Audi EV plan: Audi aims to sell approximately 800,000 fully electric cars and plug-in hybrids in the year 2025. To enable about every third customer to decide in favor of an e-model by the middle of the next decade, there is to be an electrified variant in each model series by then—most of them are to be fully electric, with a smaller proportion as plug-in hybrids. (5/10)

E-bus coming: Motor Coach Industries (MCI), the largest transit bus and motorcoach manufacturer and parts distributor in North America, announced that its all-electric J4500e prototype—a battery-electric version of the J4500 coach—successfully completed its phase one testing. MCI said that the coach ran flawlessly at both low and high speeds up to a sustained 70 mph (113 km/h) on the highway. The all-electric J4500e coach is on schedule for January 2020 production and orders are being taken now. (5/10)

CA solar requirement: California just mandated that nearly all new homes have solar, starting in less than two years. Now, it’s going to have to figure out what to do with all of that extra energy.  Already, the state is flooded with so much solar power during the day that it has to turn off some of its sun-fueled plants at times and often needs to ship excess green energy to neighboring states. (5/10)

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