Helping America Navigate a New Energy Reality

Peak Oil Review – 18 Jul 2016

By on 18 Jul 2016 in Peak Oil Review

Quote of the Week

“When oil prices crashed in the 1980s, the same thing that is happening today occurred in the industry then: companies went out of business and workers were laid off. And because there were few job openings, very few young people between the mid-1980s and 2000 went into oil and gas. As a result, much of the workforce that stuck around is now aging and moving closer to retirement, setting up the industry for a labor crunch, or the ‘Great Crew Change,’ as some dub it. There are too few experienced professionals to replace retiring workers.”

Nick Cunningham, Oilprice.com

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

1.  Oil and the Global Economy

Concerns are rising that the predictions of the oil markets coming back into balance later this year are wrong and that lower oil prices are ahead. Oil production is not falling as fast as predicted. Some outages are coming to a close and the growing glut of oil products could be as bad as last year’s crude glut. Many analysts now are talking about prices falling below $40 in the next few months and a few are even talking about a return to the $30 level.  Although US crude stocks have been falling of late, the growth in the inventories of refined products continues to grow. Europe is running out of storage space for refined products which would force a cut in refining and result in lower demand for crude.  Increased refining to support the summer driving season in the US has only another few weeks to run before the increased demand for gasoline comes to an end. The US oil rig count was up for the 6th time in 7 weeks and North Dakota reported that its oil production increased slightly in May.

Last week oil prices bounced around as markets responded to various pieces of bullish and bearish news, settling up slightly for the week at $45.95 in New York and $47.61 in London. Warnings that the product supply glut is not yet over abound. The major analytical organizations were heard from last week with predictions that the oversupply situation would end in 2017; the IEA is concerned that the inventories which have built up over the last two years will keep a lid on prices going into 2017.

Some are seeing a rebound t US shale oil production if prices hold around $50 a barrel. It is recognized that going forward new deepwater wells will be more expensive to drill than new shale oil wells. Although some shale oil producers have managed to reduce their costs by 40 percent, analysts admit that this saving has come mostly at the expense of oil service companies, some of which are now selling their services at below cost to keep in business. Analysts are also touting the industry’s concentration on the more productive “sweet spots” as a way to reduce the cost per barrel, without acknowledging that “sweet spots” are a limited asset that will be depleted in a few years.

OPEC produced an upbeat report for 2017, predicting an increase in demand, but noting that Brexit could hurt prospects for economic growth in the EU. The cartel’s production hit a new all-time high in June, but this may be a temporary peak as several OPEC members are facing problems that could affect production in the coming months. Some are asking whether OPEC will be able to supply the market in the years ahead as most expect demand to continuing increasing into the next decade and investment in new production is well below that needed to support demand.

2.  The Middle East & North Africa

Iran: The pace at which Tehran has regained some 80 percent of its pre-sanction exports has surprised most experts. Some note, however, that supply outages were a big help to the Iranians as traditional suppliers were not able to come up with the necessary oil and Tehran could take over their market share without lowering prices. Iran wants to double its exports in the next few years by attracting billions of dollars in foreign investment. Increasing sales to the EU, which is not particularly happy with Russia being a big source of energy, is one of Tehran’s top goals.

The cornerstone of Iran’s dealings with foreign oil companies has been the “buy back” plan which has been in place for more 20 years. This plan bans foreign oil firms from booking reserves of Iranian oil or having stakes in Iranian oil companies. Last week, Iran’s “Resistance Economy Headquarters” which is a new body formed to make sure that policies are in line with the views of Supreme Leader Ayatollah Khamenei approved the outlines of the post-sanction contract that will be offered to foreign oil companies. This contract is said to look much like the old one, signaling that the hardliners have won the Ayatollah’s blessings and that the government’s plan to grow the oil industry by offering more attractive contracts to foreign oil companies may not be in the cards. We now have to see how potential foreign investors in Iran’s oil industry react. There may not be the surge in Iran’s production over the next few years that many had been expecting as political dogma tops economic realities.

Syria/Iraq:  Terrorist attacks around the world are leading to increased pressure to destroy the Islamic State in Syria and Iraq where it holds territory. The US is sending an additional 500 troops to Iraq to aid in retaking Mosul and has been talking with Russia about coordinating attacks on ISIL targets in Syria. With so much of the world’s military power concentrated against it, ISIL has little choice but to give up the territory it holds and if possible to disperse around the world to continue its Jihad through isolated terrorist attacks.  The problem, of course, is what happens in Syria and Iraq after ISIL is no longer a military threat. Many are pessimistic that there can be a political settlement that will bring stability to the region in the near future.

The political situation in Iraq and Syria continues to deteriorate. In Syria, no successor to the Assad government is anywhere in sight, and in Iraq the current Shiite government is coming under pressure from supporters of Muqtada al-Sadr to resign.

As part of its request for a new $5.3 billion IMF loan, Baghdad apparently has agreed to let Kurdistan pursue a separatist oil policy. If such a policy comes into effect, Iraq may be able to maintain or even increase its exports in the future despite the lack of capital to expand its oil industry. After 27 years of trying to get its act together, Iraq has exported its first cargo of liquefied petroleum gas thereby providing another source of revenue and reducing the wasteful practice of flaring.

Libya: Forces allied with the UN-backed government, with considerable foreign assistance, are closing in on Sirte, the last major city still in Islamic State hands. Without any means of resupply and with the government militias aided by the special forces of several NATO countries, the half-life of the Islamic state in Libya should not be too long. At the peak of its power the movement was able in inflict much damage on oil facilities up and down the coast.

Two weeks ago, in a complicated deal, the two oil companies representing the eastern and western governments agreed to merge and increase oil production and exports. The new company will be based in Benghazi, half way between the two seats of government. A few days later the Petroleum Facilities Guard, which controls the oil export terminals, announced plans to resume exports from eastern terminals that have been closed since 2014. If these ports are reopened, it will mean that the country now has an export capacity of some 860,000 b/d.

Analysts warn against optimism. There has been war damage to at least two of the terminals over the last few years and most of the oil industry suffers from the lack of maintenance. Foreign specialists have largely been withdrawn from the country due to the instability. There have been several “false-starts” to reviving Libya’s oil production in recent years so, for now, the markets are taking a wait and see position. Should Libya succeed in reviving a substantial portion of the 1.6 million b/d it was producing before the uprising, it would bring still more pressure on oil prices.

3.  China

Beijing produced 4.6 percent less crude in the first half than in the first half of 2015, and June production was down 8.9 percent from June of last year. The recent production decline is mostly due to low oil prices, which has made it cheaper for the Chinese to import crude rather than continuing to pump high cost oil from older, depleted fields.  Crude oil imports in the first half jumped by 14 percent as the Chinese continued to fill strategic petroleum storage facilities and feed new refineries.

China’s coal output in the first half declined by 9.7 percent from last year, as the country tries to reduce its dangerous levels of air pollution which comes largely from coal smoke. In June, coal production was down by 16.6 percent. These are some pretty significant drops considering that most of China’s electricity is produced by coal.  Natural gas production declined by 0.5 percent, but this likely came from lower oil production. China was making a big effort to develop shale gas as has been done in the US, but so far there has been little progress.

The government announced that China’s GDP grew by 6.7 percent in the second quarter, slightly more than most analysts had been expecting. Two weeks ago, however, the government revealed that it has developed a “new” way of calculating its GDP to better reflect its new “service oriented” economy.  Fiddling with the GDP calculation is something governments have done for years to make themselves look good. Outside economists believe that China’s growth is closer to 4-5 percent and that a lot of investment is still going into wasteful projects built with borrowed money. Watching numbers such as electricity consumption is a better measure of movement in China’s economy than contrived GDP numbers.

China’s crude processing grew by 3.2 percent in June to a record 11 million b/d in June. Nearly 10 percent, or over 1 million b/d of China’s refinery production, is now being exported. The increase over last year is running about 38 percent higher. Much of this is attributable to shipments of diesel oil suggesting that Chinese industry and agriculture which are the main consumers of diesel cannot consume all that is being produced as industrial production slows.

The decision by the International Tribunal in The Hague that Chinese historical claims to large pieces of the South China Sea has no legal basis is raising concerns across the region.  Beijing immediately rejected the decision saying that it will use force to defend its right to the disputed area. The South China Sea is a major shipping route for much of Asia and is believed to contain a considerable quantity of oil which is Beijing’s main reason for claiming sole ownership of the area.

As its fresh water problems grow, Beijing is supposed to be making a major effort to increase saltwater desalination. In 2014 the government announced a plan to construct a new plant to provide Beijing with some 3 million tons of fresh water a day by 2020. Recent reporting, however, suggests that China’s desalinization efforts are not going well. Local officials are unwilling to commit to buying expensive desalinized water unless there is no alternative. As droughts and floods alternate almost yearly, the interest in desalinization has been going up and down like a yo-yo. Most of China’s desalinized water is going to industrial facilities, which are required to supply their own water rather than tapping the country’s shrinking fresh water resources.

4. Nigeria

Despite an increase in production of 98,000 b/d between May and June, the situation in Nigeria remains volatile. The government says there is a truce in place in Niger Delta, a claim which the Niger Delta Avengers, the main insurgent group, denies. Last week the Avengers claimed to have blown up a major 48” export pipeline belonging to ExxonMobil. The company denied that there had been any such attack. but said that a “system anomaly” was causing it to declare force majeure on the oil coming to the Qua Iboe export terminal.  Exxon’s denial that the declaration of force majeure was not caused by their attack elicited a threat from the Avengers who said Exxon was lying about the damage to the pipeline that will take many months to repair. The insurgent group threatened to start killing ExxonMobil workers if the company continued to lie.

The Avengers continue to hold that President Buhari is refusing to enter into talks with them about the distribution of oil revenues and say they will continue to attack oil facilities until Nigeria is no longer exporting oil.

5. Venezuela

The International Energy Agency says that Venezuela’s oil production has fallen to a 13-year low as power shortages, the food crisis, and the lack of money to pay foreign contractors or import needed supplies have slowed production.  The Agency says that production in June sank to 2.18 million b/d, down by 240,000 b/d from June 2015. Given the economic situation, we will likely see further declines before the end of the year. Barclays forecasts that production will fall to 2.1 million by the end of the year, but others expect production will be down to 1.7 million b/d before the year is out.

Venezuela has many mature oil fields around Lake Maracaibo that require constant drilling to maintain production. Sufficient investment to maintain production was not taking place even when oil was at triple digit prices and now the situation is worse. The production of heavy oil from the Orinoco Belt is falling because the national oil company can no longer afford to import the light crude so that the Orinoco oils can be blended into saleable products.

Last week, President Maduro extended the state of emergency and put the armed forces in charge of food. As the military was already deeply involved in the food business, it is doubtful that this change will make much difference. Over the weekend, the Maduro government again opened the border with Columbia for 12 hours to allow Venezuelans to buy and bring home food and medicines from Columbia. In the meantime, the social/economic situation does not get any better: there are lines day and night at food stores. Any food facility not guarded by the military is promptly overrun and looted by hungry crowds. The police are powerless to stop the criminal gangs that roam the city.

When Kimberly-Clark closed its factory last week saying that it could no longer import the raw materials necessary to continue production, the Maduro government promptly seized the factory, turned it over to the workers, declared that the company had plenty of raw materials in storage and that the factory would continue producing paper products for the benefit of the people.

All this is not going to have a happy ending and it is almost certain that oil production will be lower in the coming years.

6.  The Briefs

World oil report: Most oil projects planned over the next decade are economically viable with prices below $60 a barrel as explorers succeed in squeezing costs, consultant Wood Mackenzie Ltd. said. Oil explorers will be able to add 9 million barrels a day to global supply by 2025 with Brent crude under $60, mostly US shale oil. The world will need all 13 million daily barrels of planned capacity by 2025, plus an additional 10 million, to meet rising consumption and make up for declining production at oilfields currently in use, according to the consultant. (7/13)

Seismic breakthrough: Shell spends hundreds of millions on seismic exploration. This could change soon, if novel sensors prove their worth and cost-efficiency. Instead of the hundred thousand clunky, cable-dependent sensors that Shell is using now, the company might be able to stick a million Tremornets a couple yards apart, covering a huge surface at no change of price. (7/13)

Oil tankers face choppy waters over the next 18 months as a torrent of new ships pushes down freight rates, just as buoyant oil demand slows, potentially ending a successful run for the sector. (7/12)

The fossil fuel industry risks losing $33 trillion in revenue over the next 25 years as global warming may drive companies to leave oil, natural gas and coal in the ground, a Barclays energy analyst says. (7/12)

In the UK, the appointment of Theresa May as the new Prime Minister is likely to be a good development for the UK oil and gas industry, according to her voting record in Parliament.  May has historically voted to help the onshore fracking sector. (7/14)

New Prime Minister Theresa May, appointed Wednesday, dismantled the British Department of Energy and Climate Change and rolled its responsibilities into the larger Department for Business, Energy and Industrial Strategy. (7/16)

Theresa May’s decision to abolish the department of energy and climate change in Thursday’s ministerial reshuffle has provoked angry criticism from environmental groups and some MPs. (7/14)

The Norwegian government confirmed Wednesday an oil and gas discovery was made in a North Sea area not previously known to contain hydrocarbons. The Norwegian Petroleum Directorate confirmed a discovery was made in a wildcat well about eight miles south of the Brage field in the North Sea. The NPD said a well drilled by Faroe Petroleum may hold between 42 million and 80 million barrels of oil equivalent. (7/14)

Kuwait is considering privatizing its oil-field services sector, in a potentially controversial move in the petroleum-dependent Persian Gulf state. Fears of industry privatization and pay cuts fueled a three-day strike in April in Kuwait, knocking out nearly half of the country’s production of 2.8 million barrels a day and demonstrating that labor unrest can cause output problems even in tightly controlled Middle East nations. (7/13)

Indian Prime Minister Narendra Modi is cutting outstanding deals on behalf of India for natural resources projects with a variety of sources around the world. In May, Modi signed a deal with Iran and Afghanistan to develop a port on the Gulf of Oman. India will provide $500 million in financing for the port. (7/14)

China downer: Three years after spending $15 billion on an ambitious bid to revitalize a troubled oil-sands project in a northern Canadian swampland, one of China’s largest state-controlled oil companies has run out of gas. (7/15)

Offshore Australia, Schlumberger subsidiary OneSubsea secured an engineering contract from Woodside to help develop the $2 billion Greater Enfield project off the northwest coast. The target is a basin that holds up to 69 million barrels of oil equivalent, which will be developed using an offshore floating production, storage and offloading vessel. (7/16)

Tunisia is reducing energy production, adding to the economic pressure on the fragile nation that was the only real success story to emerge from the Arab Spring. The North African country’s energy-import bill has risen 45 percent to 5.5 billion dinars ($2.5 billion) since 2010. Domestic oil production dropped by about a quarter over the same period to 63,000 barrels a day last year. Only one exploration well has been drilled this year, instead of the eleven planned, and international companies are pulling out amid strikes and protests. (7/12)

In Algeria, with strengthened safety measures in place, Statoil and BP pledge their commitment to the North African nation despite militant attacks on their facilities. (7/14)

In South Sudan, the biggest banks and insurers in Africa, including Old Mutual Plc and Standard Bank Group Ltd., are temporarily closing operations and evacuating staff after violence between rival political factions in the nation’s capital, Juba, left at least 272 people dead. (7/13)

Angola is at a critical juncture as its government sees a bleak year ahead as the continued oil price slump has made it halve its 2016 growth forecast. The finance ministry said in a statement late Monday that due to the sharp fall in prices earlier this year it has cut its GDP growth forecast for this year to 1.3% from its previous estimate of 3.3%. (7/15)

The Brazilian government gave permission to Petrobras to suspend production at sixteen oil platforms as the troubled state-owned firm attempts to reduce costs. Despite posting record oil and gas output in June, Petrobras has been battered by the low cost of oil, a domestic economy mired in recession, and involvement in a major bribery scandal that has rocked Brazil’s political establishment. (7/16)

Argentina has been shaping up as one of the best places on Earth for oil and gas exploration. But those plans hit a major hitch late last week when the country’s Supreme Court stepped into the regulation of commodities pricing. Argentina’s highest judges moved last Thursday to suspend planned price hikes for natural gas which Argentina’s new government had previously promised would fix natgas rates as high as $7.50/MMBtu — an elevated level that would have given producers and explorers in the country a big leg up. (7/13)

As the Canadian oil-sands hub of Fort McMurray, Alberta, battles to rebuild after wildfires that ripped through in May, the industry that made it a boomtown is contemplating the end of an era of rapid growth. High costs, tighter regulations, and tougher competition from shale oil have turned the industry into one of the biggest casualties of a two-year-old swoon in oil prices. (7/11)

Canadian LNG: Royal Dutch Shell and its partners delayed for the second time this year a final investment decision on a terminal to export liquefied natural gas from Canada’s Pacific Coast to Asian markets. A glut of LNG is emerging globally as ventures start up in Australia and the U.S. analysts have cast doubt on Canada’s ability to deliver LNG exports this decade. (7/12)

Canada/Ukraine: Energy ties have the potential to strengthen under a newly-minted trade agreement between Canada and Ukraine. The nations’ two prime ministers signed a free-trade agreement in Kiev, which both sides said provides new opportunities from defense to energy. (7/12)

The US oil rig count rose by six last week to 357 operating rigs, with the gas rig count rising by one to 89, according to Baker Hughes Inc.  With the total count now at 447 rigs, drillers have added rigs for six of the last seven weeks. The count hit an all-time peak at 4,530 in 1981, while an all-time low was recorded this past March. (7/16)
U.S. oil explorers are yet to fully reap all the rewards of horizontal drilling techniques that helped trigger the shale boom, research firm IHS showed. Bottom of Form
From Texas to North Dakota, the method still stands to boost production from old, conventional wells where low permeability has restricted extraction to a fraction of their potential. (7/15)

U.S. shale is the lowest cost option for new oil production and is likely to be more competitive than conventional offshore drilling, according to a new report from Wood Mackenzie. The report concludes that U.S. shale companies have managed to cut costs by as much as 40 percent since 2014. Those savings come from lower costs from oilfield service firms, improved productivity from the average well, and improved ability to find “sweet spots.” (7/14)

U.S. high-yield bonds in default reached the highest levels in at least six years as more energy companies buckled under pressure from stagnant oil prices. Speculative-grade U.S. defaults spiked to 5.1 percent of the total outstanding in the second quarter from 4.4 percent in the first, according to a July 12 report from Moody’s Investors Service. Fitch expects skipped payments to hit $90 billion by year-end. (7/13)

Wall Street debt investors have encircled beleaguered oil producer Permian Resources LLC, founded by the late Aubrey McClendon, and are in early talks to take control of it in a deal that could also take the company public.  Credit-rating firms have said is likely to run out of cash by early next year barring a big rise in oil prices. (7/13)

One reason that US shale production won’t necessarily spring into action in short order is because the people and equipment that were sidelined over the past two years can’t come back at a moment’s notice. Oilfield service companies have gutted their payrolls and stacked rigs and equipment. (7/11)

BP on Thursday estimated costs from its deadly 2010 Gulf of Mexico spill will total $61.6 billion after it agreed to a new $5.2 billion charge it said largely drew claims to a close. (7/15)

In Alaska, the impact of falling oil prices, which has seemed for many residents like a distant worry until now, is about to land. Some $1.3 billion in spending cuts imposed last month by the governor, an independent, will almost certainly take effect on top of cuts that lawmakers in the Republican-controlled Legislature had already agreed on. (7/16)

In Kansas and Oklahoma, state policymakers are showing that insofar as humans are causing earthquakes, they can stop them, too. After restricting oil and natural gas operations in certain hotspots, Oklahoma is feeling an average of about two earthquakes a day, down from about six last summer, and Kansas is feeling about a quarter of the tremors it once did. (7/15)

Shale-rich Oklahoma experienced more than a dozen seismic events in the five days ending Friday, data from the U.S. Geological Survey show. The largest of the 16 seismic events since Monday was a magnitude-3.6 quake. (7/16)

In Colorado, energy companies are spending millions of dollars to derail a push by environmentalists to put measures on November’s ballot that would stifle oil and gas drilling in the state. Two statewide initiatives would transfer regulatory control of oil and gas development to local governments and create more stringent setback requirements to keep oil and gas activities away from occupied structures. (7/15)

The gasoline glut has multiple causes, including lower-than-expected U.S. demand and a flood of exports from China. Perhaps the biggest is that refineries went flat-out to make gasoline earlier this year when profits from making diesel tanked, according to Wood Mackenzie Ltd. (7/15)

U.S. regulators on Wednesday proposed a rule on trains carrying crude that requires railroads to share information on the shipments with local governments and emergency responders, a month after a fiery derailment of an oil train along Oregon’s scenic Columbia River gorge. (7/14)

Republican Donald Trump’s selection of Indiana Governor Mike Pence as his running mate cheered the U.S. energy industry and dismayed green advocates, with both sides citing Pence’s support for coal mining and defiance of President Barack Obama’s climate-change agenda.  Trump has called climate change a hoax. (7/16)

Gas exports: With natural gas pipeline exports to Mexico on the rise and the ramp up of US LNG exports from Louisiana, the US Energy Information Administration on Tuesday projected the US will become a net exporter of natural gas in the second half of 2017. (7/13)

Natural gas-fired electricity generation in the U.S. is expected to reach a record level this year, providing 4% higher than in 2015 and ultimately providing 34% of total electricity generated this year. Coal’s share of the 2016 U.S. electricity generating mix is expected to be 30%, nuclear, 19%, and renewables, 15%. (7/15)

Hydro mini-bump: In 2016, nearly 300 megawatts (MW) of electricity generating capacity in the U.S. is expected to come online from dams that did not previously have electric generating units, commonly referred to as nonpowered dams (NPDs). NPD capacity additions make up 92% of the 320 MW of planned hydroelectric capacity for 2016. The total is relatively small compared with total U.S. hydroelectric capacity of nearly 80,000 MW as of April. The National Hydropower Association estimates that 3% of the nation’s 80,000 dams currently generate electricity. (7/16)

Solar breakthrough: A big step in helping perovskite solar cells reach their potential as the basis for far cheaper and more efficient types of cells came this week from a team at Lawrence Berkeley National Laboratory. The results suggest that optimizing favorable faceted grains is the key. Some of the facets studied can convert the energy in sunlight into electricity at a rate of close to 31 percent, which is the theoretical efficiency limit of perovskite cells. Perovskite solar cells under development today have efficiencies of around 20 percent, while mass-produced silicon solar cells have efficiencies of 17 to 20 percent. (7/12)

Climate tiff: House Science, Space and Technology Committee Chairman Lamar Smith (R-Tex.) said Wednesday his committee was issuing subpoenas to the New York and Massachusetts state attorneys general, who have issued their own subpoenas as part of probes into whether ExxonMobil misled the public and investors about what it knew about the dangers of climate change decades ago. (7/14)

In China, stalled projects and underperforming plants have hampered desalination plans. The site of a seawater desalination plant that could provide up to one-third of the water consumed by Beijing’s households lies about 200 kilometers southeast of the parched Chinese capital.  Announced in 2014 for completion in 2019, construction has not begun. (7/12)

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