Helping America Navigate a New Energy Reality

Peak Oil Review – 14 Nov 2016

By on 14 Nov 2016 in Peak Oil Review
Quote of the Week

“I don’t think President Trump will have a big impact on oil demand or output. He’s made statements, but we haven’t seen any thought-out policies. We will have to wait for him to get a team in place and come up with policies.”

Mike Wittner, head of oil-market research at Societe Generale SA in New York

Graphic of the Week

Electric vehicle share of new vehicle registrations in 2015, highlighting leading metropolitan areas in each region (new vehicle registration data from IHS Automotive). The leaders in each region are labeled on the map. Source: The ICCT. [See a Brief below]

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

Last week oil prices suffered their fourth losing week in a row as OPEC continued to argue over a possible production freeze/cut and oil production continued to grow adding to the surplus. At week’s end, futures prices were down to $43.41 in New York and $44.75 in London.  The surprising US election results roiled for a few hours on after the results became known, but prices settled on Wednesday with a small gain and were down on Thursday and Friday on new reports of oil production increases and stockpile builds.

OPEC officials continue to maintain that the organization and Russia are committed to the Algiers deal, but most traders and hedge fund managers became skeptical after the failure of the October 28th meeting in Vienna to work out the details.

With the exception of the OPEC hype, most of the news last week was bad for prices. The EIA reported another build in US crude stocks; money managers slashed long positions in crude; the IEA reported that the global oil supply rose by 800,000 b/d last month; and that the global market will be awash in oil next year unless OPEC makes significant cuts. The Agency raised its forecast for non-OPEC production increasesnext year to 500,000 b/d with the increase coming from Russia, Brazil, and Kazakhstan.

On Friday, Iran announced that its oil production had increased by 210,000 b/d last month to 3.92 million. This was the biggest monthly increase since the end of the sanctions and 230,000 b/d more than OPEC’s estimate of Iranian production in October. Most observers see the major Middle Eastern producers jockeying for position ahead of the OPEC meeting at the end of November. Another indication of a growing glut was a report that European oil companies have been forced to book oil tankers to store their growing oil supplies as there is no longer any room left on land. There are now 14 to 16 600,000-barrel tankers storing crude in the region, and more are scheduled to be loaded in November.

Some are predicting that oil prices will fall into the low $30s or worse if the upcoming OPEC meeting is a failure. In the longer run, however, the likelihood that Venezuelan oil production will continue to shrink and the continuing drop in major oil company capital expenditures is likely to eat away at overproduction even if US shale oil production rebounds.

2.  The Middle East & North Africa

Iran: Tanker trackers confirm that Tehran’s claim that it increased production by 210,000 b/d last month to 3.92 million b/d is probably true. The Iranians say they too are optimistic that an OPEC oil production agreement will be signed, but still maintain that they are exempt so that the Saudis and others can do the freezing.

The big Iranian oil story last week was that France’s Total signed an agreement with Iran to develop part of the South Pars natural gas field. The deal, which may ultimately be worth some $6 billion, is the first post-sanctions agreement signed with the Iranians since the sanctions were lifted.  Total had started work on the South Pars field but withdrew from the project six years ago amid rising tensions over Tehran’s nuclear ambitions. For the French, the agreement was simply a renegotiation of a project that they began working on many years ago. China’s National Petroleum Corp also is set to sign a deal to develop the South Pars field. South Pars is shared with Qatar, which is already exploiting its portion of the field. The Iranians fear that the Qataris might be able to produce more than their fair share of the gas, so they are eager to increase production.

Like other Middle Eastern countries, Iran is working on laws to spur renewable energy investments, including wind, solar, and hydro projects. Like the Saudis and others, dependence on oil and gas for the bulk of its energy is not only a more expensive way to produce electrical energy, but they have to look forward to the day where production will run dry or be curtailed by climate change agreements.

Egypt’s oil minister was reported to be in Tehran last week after the Saudis stopped oil shipments to Cairo. Tehran denies that any agreement to replace the Saudis has been reached.

Tehran must be concerned about some of the campaign rhetoric coming out of the recent US elections. President-elect Trump said numerous times that as President he would tear up the nuclear agreement and bring the Iranians to heel by using military force. Given that the EU, Russia, and China are satisfied with the agreement, the impact of a unilateral US pullout would be limited if Tehran’s frozen assets already have been returned and the US has only very limited economic relations with Iran.

US Republicans are refusing to lift the remaining sanctions on Iran as Tehran continues missile tests, behaves aggressively in the Gulf, and jails US citizens. A tougher line from Washington, however, could damage the Rouhani government which is already walking a thin line in signing the nuclear agreement. Should the agreement break down, Iran would likely seek to strengthen its relationship with Moscow.

Syria/Iraq: There is little going on in Syria these days which directly affects Middle Eastern oil production. The US and various allies, including Iraqi Kurdistan, are preparing for an eventual assault on ISIL’s capital of Raqqa. Meanwhile, the many-sided struggle for Aleppo continues with ever-increasing casualties. The only thing that is certain is that there will not be much left of Syria when the civil war finally ends.

There was some oil news from Iraq last week. Kurdistan oil revenues were up in October, but still not high enough to meet the government’s needs in conducting the war against ISIL.  The Iraqi Oil Ministry, which had announced plans last month to contract for the development of 12 small oil fields to foreign oil companies, announced that those plans had been changed. State oil companies will develop some of the fields and rest of the plan has been delayed until the middle of next year.

The Oil Ministry is scaling back on plans to build a massive water injection system in Southern Iraq.  Water flooding of Iraq’s aging field is seen as the best way to maintain and increase oil production in the region. The revised project is much smaller in scope making it more affordable to implement in the short term. A smaller water-flooding system would delay plans to increase oil production to much higher levels.

Saudi Arabia: Riyadh told Cairo last week that it was halting deliveries of oil products under a $23 billion aid agreement. Although the Saudis deny it, the reason for the move is thought to be Egypt’s refusal to support the Saudis in a UN vote on the situation in Aleppo.  There are indications that Egypt may be turning to Iran to replace the Saudis as the key supplier of oil.

There are still no definitive announcements as to the Saudis’ position on the OPEC production freeze. The most we have heard is that Riyadh and its Gulf allies will not be the only ones to bear the burden of production cuts.

Low oil prices are continuing to take a toll on the Saudi economy. The government has canceled some $266 billion in planned and ongoing construction projects. The government’s unpaid bills owed to construction firms, medical establishments, and foreign consultants have burgeoned during the financial crisis. One analyst estimates that the government owes construction firms alone some $21 billion dollars. The oil price slump created a $98 billion deficit last year and the deficit in 2016 is expected to be around $87 billion despite a recent $17 billion bond issue.

The cutback in construction has resulted in the laying off of some 70,000, mostly foreign, workers and there are tens of thousands of layoffs to come. Many government contractors are going into bankruptcy for lack of government payments. Most of the burden is falling on foreign workers, who are being sent home as contracts are ended. The Saudis are eating their way through their sovereign wealth funds at a pace that will leave them in big trouble in four or five years unless oil prices recover.

Libya:  The country’s largest oil export terminal, Es Sider, may resume shipment this week as maintenance work nears completion. The terminal has not exported any oil for the last two years. Libya is currently producing about 660,000 b/d and claims to be able to produce close to 1 million if the terminals are open. Before the uprising, the country was producing 1.6 million b/d.

3.  China

Beijing’s crude imports in October fell by 12.9 percent from the record high in September to 6.78 million b/d — the lowest level of imports since January. China’s domestic production in October was down, suggesting that domestic consumption was lower than usual. During the month, China’s exports of diesel and gasoline jumped by 24 percent year over year to 919,000 b/d as Chinese refiners produced more finished products than the economy can absorb. China’s October imports, however, were still 9.3 percent higher than in October 2015. As usual, there still is not a good fix on how much of China’s oil is going into strategic storage. The bottom line is that there is still an oversupply of crude in Asia despite analysts’ hopes that the supply/demand gap would be closed by now.

Much of the energy news from China last week concerned coal and Beijing’s efforts to clean up its air by cutting production. Coal production has dropped in the last two years as the government closed many small and inefficient mines. It now appears that they have overdone the cuts and have been forced to import increasing amounts of foreign coal to keep their power plants burning. Imports of coal from Australia jumped 33 percent in the 3rd quarter and have led to a marked rise in coal prices. This, in turn, has led to government efforts to lower coal prices by manipulating the prices that large state-owned coal mines receive for their coal. Some are concerned that China’s efforts to become a world leader in setting commodity prices is being bungled by the coal situation.

Beijing has reacted with unusual vigor in warning President-elect Trump of the consequences to the planet if he succeeds in slowing progress or even torpedoing the recent climate change agreement.  Former President Bush did much the same thing with the Kyoto agreement 15 years ago. For a long time, China resisted whole-hearted participation in efforts to control emissions until dangerous levels of pollution began enveloping its major cities and giant typhoons began battering its coasts. So far the Chinese now are feeling the effects from decades of minimal pollution controls and the early years of global warming far more than dirty air and climate change is hitting the US.

India now fears that should the US pull out of the Paris agreement, other countries will follow. Beijing says it will carry on with its plans to reduce emissions no matter what the US does

4. Russia

There was not much oil news from Russia last week. Rosneft, Moscow’s largest oil producer, suffered a 77 percent drop in profits in the 3rd quarter largely due to Moscow’s export duties lagging the decline in oil prices. The weak ruble, which is partially due to the Ukrainian sanctions, has left Russia’s oil companies in good shape despite the drop in oil prices. When foreign earnings are turned into rubles, the oil companies are doing well and have been able to finance the increased drilling that keeps pushing oil production higher.

Moscow and Tehran signed a number of energy deals last week as close cooperation in the Syrian civil war has driven the countries closer together now that the nuclear issue is settled. Some analysts note that over the longer run Russia and Tehran are going to become export rivals as increased Iranian production will have to go to Europe or Asia, cutting into Russian markets there. Most EU countries are trying to reduce dependence on Russian oil and are seeking alternative sources of supply.

5. Nigeria

A new census shows that Nigeria’s population is now at 182 million with half under 30 years of age.  The Niger Delta Avengers, the militant group that has been blowing up Nigeria’s oil infrastructure for the past year, hailed the election of Donald Trump as the next US President. The Avenger seem to believe that a Trump administration will be instrumental in suppressing the militant Islamic groups that are causing so much trouble in Nigeria’s north.

The Avengers announced last week that they had blown up a pipeline leading to the Forcados terminal. No word as yet as to how much oil has been shut in. Normally if the damage is serious, somebody declares a force majeure on exports –  a declaration that has not yet been made.

In late October, Exxon announced the discovery of a new offshore field that could contain 500 million to 1 billion barrels of oil.  This is the first major oil find announced in Nigeria in many years. Offshore oil discoveries are more welcome these days as they are somewhat, but not completely, immune to militant sabotage.  The very unfavorable environment for new capital expenditures to develop oil assets suggests that it may be some time before Exxon moves to bring its new find into production.

6. Venezuela

The Vatican-sponsored national reconciliation talks, which have been going on all week, seems to have reached a preliminary agreement over the weekend and will meet again on December 6th. The agreement, however, is still far short of opposition demands that the Maduro government resign or conduct a recall election in the near future. The opposition is also demanding the release of 100 political prisoners.

The few minor political concessions the Maduro government made last week do nothing to ease the increasingly desperate situation. The government will “consider” allowing foreign donors to provide food and medicine to those parts of the country that are literally facing starvation. The country’s economic/political situation continues to deteriorate with a substantial threat to its oil production should there be a total collapse.

 7.  The Briefs

The biggest international oil companies, from Eni to BP, are reining in capital spending for 2017 and possibly longer as they try to squeeze profits from a crude market battered by a global glut. (11/8)

Deepwater drillers have continued to collapse in value. The biggest firms in the industry, Noble, Enesco, and Transocean, now trade at prices of around $4.75, $7.50, and $9.75 respectively. Stock price by itself means nothing, but it’s important to remember that all of these were companies where the stocks were once trading in the $40-$70 range. (11/9)

In the U.K., for the first time in over twenty years, the recent offshore licensing offers in the North Sea concerned what’s described as “frontier areas.” The bidding was positive as 24 companies applied for licenses covering 113 blocks; BP alone made 29 applications. (11/9)

BP and Oman Oil Co. signed a deal with the government to revise a license area for so-called Block 61 to develop the Khazzan natural gas field. The British energy company said the field holds a “significant” amount of natural gas that will “need to be hydraulically stimulated to flow gas at target rates.” (11/9)

Global flows of liquefied natural gas are set to change as the growth in a supply glut will peak in 2018 because of new production from Australia and the United States, energy consultancy PIRA Energy Group said. (11/11)

Egypt’s central bank floated the pound on Thursday in an attempt to stabilize its economy, which has been hampered by a shortage of dollars. The currency was initially devalued by 32.3 percent to about 13 pounds per dollar, down from the previous peg of 8.8 per dollar, which had been in place since March. It has since tumbled further and is now down by about 50 percent. (11/8)

In Morocco, a Carlyle Group hedge fund has lost the $400 million it invested last year in an oil refinery deal. Carlyle said it believes $400 million in petroleum commodities were “misappropriated by third parties outside the U.S.” (11/11)

Angola has been Africa’s largest oil producer for the first seven months of this year, averaging 1.7 million barrels of crude oil a day, well above Nigeria’s 1.5 million. (11/9)

In Angola, the recently announced gas discovery in the offshore Kwanza basin has a number of hurdles to overcome, say oil and gas analysts, thus it won’t be developed before the end of the next decade. Angolan state oil company Sonangol revealed the find at the end of June, stating that the discovery in Block 20/11 held an estimated 313 million barrels of condensate and 2.8 trillion cubic feet of gas. The reason for the delay in the development of this discovery is partially due to problems surrounding the ownership of the block in which the find is located. (11/12)

Brazil’s Petróleo Brasileiro SA posted an unexpected third-quarter loss of $4.9 billion on Thursday after drastically reducing the value of oil fields and other assets amid a severe downsizing and weak oil prices. (11/11)

Brazilian state-run oil company Petrobras said Tuesday it has decided to reduce prices for gasoline and diesel, after more than a year of using its near-monopoly in the domestic fuel market to shore up its cash flows. Petrobras’ board decided to reduce the price of diesel and gasoline sold at its Brazilian refineries by 10.4 percent and 3.1 percent. (11/10)

Offshore Brazil, Shell is planning to continue investing heavily as part of a bid to double its global deepwater production by the early 2020s. Shell plans to invest $10 billion over the next five years. (11/11)

Offshore Canada, Israeli conglomerate Delek Group confirmed it secured the rights to explore for reserves in the deep waters off the coast of Newfoundland. Delek Group said it secured the rights to explore an area covering about 1,000 square miles off the eastern coast of Canada, where waters are about eight-tenths of a mile deep. (11/12)

Keystone XL, the proposed oil pipeline from Canada to the US that was opposed by environmental campaigners, has been put back on the political and commercial agenda by Donald Trump’s presidential election victory.  TransCanada, the company that had been attempting to build the pipeline before it was blocked by the Obama administration last year, said on Wednesday that it remained fully committed to building Keystone XL. (11/10)

The US oil rig count increased by two to 452, according to Baker Hughes Inc. That’s the 21st weekly increase in the last 24, an increase of 136 oil rigs, since crude started trading over the key $50 a barrel level analysts say should lead to more drilling. The Baker Hughes oil rig count plunged from a record 1,609 in October 2014 to a six-year low of 316 in May as US crude collapsed from over $107 a barrel in June 2014 to near $26 in February 2016. (11/12)

Oklahoma quakes: Sunday night’s 5.0 magnitude earthquake that hit Cushing, Okla., is the latest and, in some ways, the most troubling in a series of temblors that has rocked Oklahoma over the past few years. Not only did it strike within a mile of Cushing, which is the largest crude oil trading hub in North America, but its occurrence raises questions over the state’s ability to do anything about the significant rise in seismic activity. While regulations limiting the underground disposal of wastewater have succeeded in reducing the overall frequency of earthquakes, they haven’t been able to stop the really big ones from happening. (11/9)

Pipeline protest continues: Law officers arrested about three dozen Dakota Access oil pipeline protesters in a confrontation Friday that also shut down a state highway. About 100 protesters confronted crews doing dirt work along the pipeline route where pipe had already been laid. Workers were safety evacuated, but protesters threw rocks, vandalized equipment, slashed tires on law enforcement vehicles, and used themselves and vehicles to block a county road and state Highway 6. (11/12)

Helicopter operator Erickson Inc. has put its flying fleet into bankruptcy, blaming oil and gas companies that cut back on drilling operations during a slump in energy prices. (11/10)

General Motors will lay off 2,000 employees at two car plants in the US Midwest, the latest sign that the US car industry is suffering from softening demand, especially for some smaller models. (11/10)

U.S. coal production dropped by more than 10 percent in 2015 to 897 million short tons (MMst), the lowest production level since 1986. Production in all three major coal-producing regions (the Appalachian, the Interior, and the Western) declined, as consumption of coal for electric power generation, industrial, and other uses fell by 13 percent to 798 MMst in 2015. Employment at U.S. coal mines fell 12 percent to about 66,000 employees in 2015, the lowest level since EIA began collecting coal mining employment data in 1978. (11/11)

China aims to cap coal-fired power capacity at 1,100 gigawatts by 2020, higher than the current ceiling but accounting for less of the country’s total power supply, as the top global energy market seeks to increase the use of cleaner renewable fuels. Announcing its five-year plan for the power industry, the National Energy Administration (NEA) on Monday said China aimed to have 2,000 gigawatts of electricity generating capacity by 2020, of which at least 320 gigawatts, or 16 percent, would come from solar and wind power and 110 gigawatts from natural gas. That would bring China much more in line with current power generation mixes in the United States. (11/7)

Morocco is building one of the world’s biggest solar power plants on the edge of the Sahara Desert in a project largely funded by the European Union. It is a hard success for other African nations to match as they seek to implement a new global deal to combat climate change. The huge 160-megawatt first phase of the Noor plant near the town of Ouarzazate contrasts with efforts by some other nations focused on tiny roof-top solar panels to bring power to remote rural homes. (11/7)

EVs: A new white paper from the International Council on Clean Transportation assesses which policy actions are behind the regional leading markets in the US for electric vehicles. The authors found that many of the leading market share metropolitan areas have more than ten electric vehicle promotion actions in place. Four of the areas—Portland, San Jose, San Francisco, and Santa Cruz—have 20 or more actions in place. State consumer financial incentives play a prominent role. These typically range from $1,000 to $3,000 per battery electric vehicle in most states. (11/12; see Graphic of the Week above)

Air pollution has increased worldwide since the 1980s, but it has increased at a much faster pace in regions close to the equator. (11/10)

The Indian city of New Delhi last week closed schools, halted construction and ordered that all roads be doused with water to settle dust to combat crippling air pollution. The capital, which is one of the world’s dirtiest cities, saw levels of PM2.5, tiny particulate matter that can clog lungs, climb to over 900 micrograms per cubic meter on Saturday–more than 90 times the level considered safe by the World Health Organization and 15 times the Indian government’s norms. (11/8)

Climate downer: New data released by the World Meteorological Organization shows that the five years from 2011 to 2015 were the warmest on record. The report strongly links human activities to rising temperatures. It says that some studies found that the burning of fossil fuels had increased the probability of extreme heat by 10 times or more. (11/9)

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