Quote of the Week

[In Venezuela] “Production is collapsing in a way rarely seen in the absence of a war.  The country is also suffering the worst economic depression ever recorded in Latin America.”

Francisco Monaldi, a fellow in Latin American Energy at the Baker Institute for Public Policy at Rice University (3/17)

Graphic of the Week

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

Oil prices closed on Friday at $66.21 in London and $66.34 in New York.  Prices are about in the middle of the trading range where they have been since mid-February.  The markets, torn between increasing US shale oil production and what is thought to be increasing global demand, seem likely to stay within this narrow range until there is convincing evidence one way or the other. While prices have climbed by more than 40 percent since the middle of 2017, day-to-day volatility has fallen to its lowest level since 2014.

The IEA reported last week that there was an increase in global inventories, which had declined for seven months in a row, thanks to OPEC’s coordinated 1.8-million b/d production cut. The EIA reported last week that US crude stocks were up by an unexpected 5 million barrels the week before last following an equally unexpected 2.4 million barrel increase the week before. Baker Hughes reported on Friday that the US oil rig count was up for the seventh time in eight weeks.

The OPEC Production Cut: Saudi Arabia’s proposals of new ways to measure when the oil market is balanced signals a shift in OPEC’s targets for a pact on supply cuts. From a record 3.1 billion barrels in July 2016, OECD stocks dropped to 2.85 billion barrels in December, falling 216 million barrels during 2017 and now stand just 52 million barrels above the five-year average. The five-year average is a moving target and has risen even as output curbs were in place. The average climbed to 2.86 billion barrels in September 2017 from about 2.73 billion barrels when the supply pact was sealed in late 2016.

As in several consecutive monthly reports, last week OPEC lifted its estimates for non-OPEC oil supply growth this year. This time the cartel’s estimates rival oil supply growth led by the US will outpace global oil demand growth in 2018. OPEC expects non-OPEC supply in 2018 to increase by 1.66 million b/d, compared to expectations of 1.4 million b/d growth in the previous monthly report.

The cartel expects world oil demand this year to rise by 1.6 million b/d to average 98.6 million b/d, marginally higher than last month’s assessment. Most of the oil demand growth is anticipated to originate from Asia, led by China, followed by India, and then by OECD Americas.

Dutch bank ING sees the US eating OPEC’s Asian market share.  Oil risks are sliding back under $60 a barrel as a surge in US shipments to Asia continues. The resulting fallout could drag down crude prices after a rally of more than 40 percent since last June.

US Shale Oil Production: Crude production in the lower 48 states grew by 20,000 b/d the week before last. Most of this increase is coming from the Permian Basin where the EIA forecasts that production will grow by 80,000 b/d between March and April. If Permian production can continue at anything close to this rate of increase, US shale oil production could be up by the forecast 1 million b/d during 2018 when combined with smaller increases from other shale oil fields. Therefore Permian production is one of the key issues facing the world’s oil supply and prices in the coming year.

There are problems on the horizon, however.  The surge in Permian Basin drilling, which is driving record gas production growth there this year, now appears to be facing market and infrastructure constraints that could come as early as the second quarter.  The rig count in the West Texas-New Mexico play edged up to 437 last week and is now at its highest point since early 2015.  The addition of nearly 60 rigs to the basin since mid-October has boosted dry gas production there by more than 1 billion cf/d, or about 20 percent over the same period last year. Permian gas production is now at its highest level on record — an estimated 7.2 billion cf/d. There have been reports that recent Permian wells are producing more natural gas than expected. More gas than expected only adds to the problem as it appears there will not be enough pipeline capacity to move this gas to market in the near future and there are limits on how much natural gas can be flared.

Newspapers are beginning to understand the difference between US shale oil which is at the light end of the spectrum and the heavier oils that are produced elsewhere. While the lighter shale oil is fine for making gasoline, it is not the best for making diesel, jet fuel and heavier oil products that the world increasingly needs.  For years US refineries have been built to process the heavier grades of imported crudes and most were not designed to refine the lighter shale oil. Many have coking units designed to extract the maximum amount of diesel from heavier barrels.

The US seems to be close to running out of the capacity to refine shale oil and increasing quantities are being exported as there is no domestic market or place to store them. “The dirty secret of US shale is that not many people want it,” says Bill Barnes of Pisgah Partners.  While the IEA argues the 100 million b/d global refining system is flexible enough to swallow the lighter crude, there is evidence US shale is not being uniformly embraced. Morgan Stanley said last month that, at a minimum, US shale producers would need to accept lower prices to incentivize refiners to use it as supplies grow.

2.  The Middle East & North Africa

Iran: Concerns are increasing that President Donald Trump’s decision to replace his secretary of state increases the probability the nuclear deal with Iran will be abandoned in May. Failure to recertify the deal could lead to the re-imposition of secondary sanctions and pressure from the US on other countries to reduce their purchases of Iranian crude. Some are saying that the re-imposition of US sanctions, coupled with new sanctions on Venezuela, could result in a loss of over a million b/d in global exports by the end of the year.

Tehran already has said that should Washington impose new sanctions it will be free to resume nuclear development. Last week Saudi Arabian Crown Prince Mohammed bin Salman said his country would quickly obtain a nuclear bomb if Iran successfully develops nuclear weapons.

Iranian oil minister Zanganeh said OPEC could agree in June to begin easing oil production curbs in 2019.  Iran wants to keep oil prices around $60 a barrel to contain US shale oil production. Higher prices will motivate more production of shale oil in the United States.

A consortium of Russian and Iranian companies signed an agreement to develop two oilfields near Iran’s border with Iraq. This is Iran’s second deal since the nuclear pact. Last year, Tehran signed a $5 billion agreement with France’s Total SA and a Chinese oil company to develop an offshore natural gas field. Tehran so far is disappointed at the lack of Western investment in its oil industry following the nuclear pact.

Iraq:  Baghdad is hitting a roadblock in the next phase of expanding its oil production capacity as international energy firms lose interest in investing in Iraq’s low-return oil industry.  Most international oil firms in Iraq are revising their oilfields’ plateau production levels even lower.  Iraq’s oil production has risen rapidly in the past decade from 2.5 million b/d to a peak of 4.71 million in late 2016.

Most of the growth in Iraqi oil production has come from the efforts of major oil companies such as BP, Exxon Mobil, Lukoil, Eni, Total and Royal Dutch Shell, which oversaw the redevelopment of Baghdad’s oilfields after the US invasion in 2003. However, the foreign companies have long complained that the technical service contracts Baghdad offers are too stringent and give little return on investment. Most companies in the past five years negotiated their production levels lower, forcing Iraq to reduce its capacity expansion plan from 12 million b/ d to 9 million b/d by 2018.  This new target now is unattainable, so Iraq has established a new target of 7 million b/d by 2022.

China’s ZhenHua Oil Company, a subsidiary of state-owned arms manufacturer Norinco, is planning to make two new investments in Iraq’s oil sector. ZhenHua will forming a new joint venture with the State Oil Marketing Organization for the development of the East Baghdad oil field.

Two northern Iraqi oil fields have re-started production, five months after they were shut-in following a federal military operation which regained control of Kirkuk. The North Oil Company has increased the amount of crude it is sending to refineries in Kurdistan. This is a sign that Baghdad and the Kurdistan Regional Government are making progress  to resolve a political impasse that has stranded some 300,000 b/d of oil production from around Kirkuk.

Saudi Arabia: Saudi Aramco’s listing on foreign stock exchanges is unlikely to go ahead this year according to British officials who have been warned by the Saudis that the IPO will be delayed to at least 2019.  While the delay has several motivations, from regulatory risk to competing projects, some are saying that the lack of interest in investing by major US financial institutions is behind the project.

Although the Saudis claimed that Aramco was worth $2 trillion, there were doubts about that valuation from the start, and now these are deepening. Aramco has never published financial reports, and although there were assurances that it would start doing so, so far this has not happened. Some are saying that it would take an oil price of $80 a barrel for the firm to generate enough cash flow to pay dividends. This coupled with concerns about instability in the Middle East explains the lack of enthusiasm for buying a stake in the firm.

Saudi Arabia will keep its crude exports below 7 million b/d in April as it stays committed to draw down excess global inventories and boost oil prices, according to the Saudi energy ministry. The Saudis plan to continue pumping below 10 million b/d next month, again over-complying with their pledge to not exceed the ceiling of 10.058 million b/d.

Last November, the Saudi government locked up hundreds of powerful businessmen and royal family members in the Ritz-Carlton hotel in Riyadh in what it said was a crackdown on corruption.  While most have since been released, they are still living in fear and uncertainty. Many were subject to coercion and physical abuse, witnesses said. In the early days of the crackdown, at least 17 detainees were hospitalized for physical abuse and one later died in custody.  Most of the detainees are barred from travel and cannot obtain access to their financial accounts and are required to wear ankle bracelets to track their movements.

Reports such as these have reduced enthusiasm of foreign investors considering investment in Saudi Arabia.  Saudi Arabia’s crown prince is scheduled to meet with President Trump this week. The meeting will mark the beginning of Prince bin Salman’s US trip, which is expected to include stops in New York, Boston, Houston, San Francisco and Seattle over the next two weeks as the prince seeks investors for his plan to revamp the Saudi economy.

3.  China

Production from assets the Chinese state oil companies own abroad now exceeds domestic production, increasing the country’s dependency on foreign oil. However, much of the oil produced abroad does not end up in China for various reasons, including shipping costs and better revenues if it gets sold to another market rather than imported into China.  The IEA recently estimated that China’s domestic production of crude oil will only be enough to cover 30 percent of demand this year and will further slide to 25 percent by 2023.

China’s push to cut pollution and make millions of households switch to natural gas from coal for heating this winter resulted in China becoming the world’s second-largest LNG importer in 2017.  Some say the US is well-positioned to seize this opportunity and export even more of its growing gas production to China,  but this depends on how long US natural gas production will continue to increase.

Some observers believe that US production natural gas production will soon start to decline and bottlenecks to transporting natural gas from the Permian Basin are already developing.  In addition, there are limits on how much LNG can be moved through the Panama Canal.  All this, and the developing tariff quarrels with China, suggest that the US is unlikely to become a major supplier of LNG to Beijing.

4. Russia

Most of the news last week derived from the continuing deterioration in relations between Moscow and the West in the wake of an alleged Russian assassination attempt against a former intelligence officer who defected. The British government is outraged by Moscow’s actions and is seeking other sources of natural gas.  Most European governments would like to do the same, but for now, there is no other source of supply other than Russian gas fields. There is not enough LNG on the market as yet, and pipelines from the Middle East and Central Asia have yet to be built.

Moscow is attempting to build two new pipelines into Western Europe that would detour Ukraine and the ongoing fight over payments for transit. If these are completed, EU dependence on Russia for its energy could become worse.

The official announcement that Exxon is dropping out of its agreements with Russia that were signed before the Crimean takeover is raising speculation as to whether Moscow can develop Arctic oil by itself. Conventional on land oil production in Russia is still growing slowly, but to continue as the world’s largest oil producer, it likely will have to start large-scale production from beneath the Arctic Ocean or develop the shale oil it claims to have.  Right now it seems that Moscow does not have the technology to drill in Arctic waters and was looking for help from Exxon.  It will be interesting to see how this plays out in coming years.

5. Nigeria

The news for Nigeria remains monotonously the same. The fuel shortage rolls on with the government admitting that it spends vast amounts a year to subsidize imported gasoline and other oil products to keep retail prices down. The commission charged with finding the billions of dollars of missing oil revenue reported for the umpteenth time that it is not making any progress.

The who-should-pay-for-oil-spills saga continues apace. While some spills are the fault of the international oil companies, most are caused by thieves, either professional or amateur, drilling into oil and gas pipelines to steal some oil or gas. The thieves usually leave the pipe draining onto the land before the oil companies can stop the leaks. In the last 50 years thousands of acres of land and water have been contaminated. The government wants the oil companies to pay for the cleanup and the oil companies say it was not their fault. The Court of Appeal in London recently ruled that two Nigerian communities cannot pursue Royal Dutch Shell in English courts over oil spills in Nigeria’s Delta.   The Nigerian government is very unhappy as a favorable ruling in a British court would have increased chances of collecting something from British companies.

Last week Amnesty International jumped into the dispute by accusing Shell and Eni of negligence when addressing spills in Nigeria.  Amnesty described the oil company’s actions as “serious negligence”, and said the companies were “taking weeks to respond to reports of spills and publishing misleading information about the cause and severity of spills”. A Shell spokesman said the allegations “are false and fail to recognize the complex environment in which the company operates”. An ENI spokeswoman said the rights group’s statements “are not correct and, in some cases, not acceptable,” adding it had provided a detailed response to Amnesty’s allegations.
6. Venezuela

Crude oil production in Venezuela decreased from 2.3 million b/d in January 2016 to 1.6 million in January 2018,  and production will likely continue to decline. The number of active rigs has fallen from near 70 in the first quarter of 2016 to 43 in the last quarter of 2017. Missed payments to oil service companies, a lack of working heavy oil upgraders, a lack of knowledgeable managers and workers, and declines in capital expenditures have accelerated the decline.

Venezuela’s oil production lost another 60,000 b/d in February, according to the IEA, and continues to be the largest supply risk to the global oil market. The IEA noted that even if Venezuela’s production levels hadn’t dropped so fast over the past year, and if it had produced at the agreed-upon level prescribed in the OPEC deal, the cartel would still be posting close to a 100 percent compliance level.

There is speculation that an aggressive turn in US foreign policy led by incoming Secretary of State Mike Pompeo could trigger further loses in oil production as the Trump administration ramps up sanctions on Venezuela.

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

Norway’s Statoil name change to Equinor As is part of its effort to recast itself as the world’s greenest oil company. Statoil is in the midst of a strategic shift to renewable-energy production. It will remain an oil-and-gas giant but has pledged to increase its investment in renewable energy to between 15% and 20% of its total spending by 2030, up from 5% last year. (3/16)

Statoil = Equinor??? Oil majors aren’t famed for their pranks, but Statoil ASA had analysts checking it wasn’t April Fool’s Day when it announced a new name that turned out to have been acquired from an Oslo veterinary practice specializing in horses. Should shareholders back the change at its annual general meeting in May, Statoil will be called Equinor, a name intended to reflect the Norwegian oil company’s commitment to cleaner energy sources. (3/17)

Shipping fleet emissions: BP expects more than 90 percent of the world’s shipping fleet will comply with new regulations slashing sulfur levels ships are allowed to burn starting 2020, a company executive said on Tuesday.  Coming International Maritime Organization rules will cut the amount of sulfur emissions that ships worldwide are allowed from 3.5 percent to 0.5 percent by 2020. (3/14)

Tanker storage: Traders have booked at least three 90,000-ton tankers to store summer-grade gasoline for up to 60 days off the coasts of the Netherlands as supplies in northwest Europe have steadily increased this year, pushing prices down.  As of March 9, the northwest European gasoline refining margins were US$1.67 per barrel, the lowest level since December 2014, as winter-grade gasoline prices plunged. (3/17)

British Petroleum has begun to sell off its mature oil fields in Egypt to shift its focus to developing the country’s large natural gas reserves. BP is hoping to raise roughly $1 billion from a deal. BP has an overall goal to sell between $2 billion and $3 billion in assets this year, less than last year when it sold $4.3 billion in properties, leases, and projects. (3/16)

Kazakhstan’s sovereign wealth fund has offered Shell up to a 20 percent stake in KazMunayGas in a bid to raise the value of the state oil company ahead of a planned listing. Kazakhstan’s fund has plans for an initial public offering of KazMunayGas at some point after 2018, as part of a government privatization program. (3/14)

The United Arab Emirates and Qatar have extended a concession for an offshore oilfield that the two share—but warily, since the UAE is part of a regional blockade against Qatar, led by Saudi Arabia. (3/14)

Mexico vs. US energy trade: In each of the past three years, the value of US energy exports to Mexico (gasoline, diesel fuel, natural gas) has exceeded the value of US energy imports from Mexico (crude oil). (3/15)

In Mexico, the front-runner in July’s presidential election wants to upend Mexico’s newly-opened energy sector. Andres Manuel López Obrador, a leftist nationalist with a comfortable lead in the polls, has rattled investors by calling for a temporary freeze in new private investment in exploration and production of oil. But he plans to shift federal spending to refining from exploration and production that critics say could have the most dramatic consequences for the Mexican economy and US refineries along the US Gulf Coast. Eventually, Mr. López Obrador wants to completely halt exports of crude oil—a critical source of revenue for the country—because Mexico has become too dependent on the US for refined gasoline. (3/13)

The US oil rig count increased by four to 800, well up from 631 last year at this time, according to General Electric’s Baker Hughes energy services. (3/17)

US energy pipeline developers say they intend to pursue exemptions to the Trump Administration’s proposed steel tariffs, as concerns grow for those companies and from key exporters to the United States like South Korea. (3/15)

Offshore bumps: The Trump administration’s plan to broadly expand drilling in US offshore waters is moving slowly due to opposition from coastal states and indifference from oil companies that have turned their focus to other opportunities. The administration hopes encouraging US energy development outside of shale oilfields will further its goal of “energy dominance.” But existing Obama administration lease rules remain in place through 2022 unless the new rules gain approval. (2/13)

OK quake rules: Last month the Oklahoma Corporation Commission created the new earthquake protocol after hydraulic fracturing operations set off more than 70 earthquakes of at least 2.5 magnitude since 2016. The commission ordered all drillers to deploy seismic arrays to detect ground motion within five kilometers of hydraulic fracturing operations over a 39,000-square-kilometre area in the center of the state. Frackers must suspend their operations immediately for up to six hours after causing a 2.5 magnitude earthquake which can be felt at the surface. (3/13)

Mineral rights feud: The US is one of the only countries in the world that lets private individuals own the minerals under their land, a policy that dates to the founding fathers. The National Association of Royalty Owners estimates some 12 million American landowners receive royalties for the exploitation of oil, gas and other mineral resources. But as US production reaches record levels, a complex web of laws and court rulings is evolving over how these royalties are distributed. That’s creating vast differences in how much money property owners actually get, and prompting lawsuits accusing energy companies of shortchanging them. (3/16)

US gasoline consumption fell by a small amount (0.006%) for the first time in five years in 2017 as Americans saw higher gasoline prices, drove more fuel-efficient vehicles and their individual travel habits evolved. Monthly data from the EIA show total US product supplied for gasoline — a demand proxy — averaged 9.317 million b/d in 2017. (3/13)

Trucking’s future fuel? Diesel will be the transportation fuel of choice for fleet operators for the foreseeable future. At a Green Truck Summit, Daimler-Benz acknowledged that alternative fuels and green technologies would play a significant role in the trucking industry. For now, diesel is still the most efficient and cost-effective fuel, and that will be the case for quite a few years, the Daimler executive said. (3/14)

Biofuels precedent? The US Environmental Protection Agency’s decision to grant a bankrupt Philadelphia refiner relief from the nation’s biofuel laws drew critics on Tuesday who say it sets a bad precedent. The EPA and the Carlyle Group-backed, Philadelphia Energy Solutions refinery agreed on Monday that the refiner will have to satisfy only roughly half of its $350 million in outstanding compliance obligations under the US Renewable Fuel Standard. (3/14)

Production of advanced biofuels made from algae could grow rapidly in the late 2020s, according to Synthetic Genomics, the biotech company that has formed a partnership with ExxonMobil to develop the fuel. The two companies said last week that by 2025 they were aiming to set up one or more demonstration plants to produce 10,000 barrels a day of diesel and jet fuel from genetically modified algae. (3/13)

BP: renewables price competitive. BP reports that the cost of generating electricity from onshore wind power has dropped off 23 percent, and dropped 73 percent for solar photovoltaic, since 2010. By BP’s standards, both now compete with fossil fuels. Projections outlined in their technology report find the cost of wind power is particular declines as wind turbines get taller, rotor blades get longer and control systems become more efficient. (3/13)

In India, French energy company ENGIE said Monday it was expanding its presence in the renewable energy sector, one of the world’s fastest-growing economies. Leaders inaugurated the Mirzapur solar power plant, a 101-megawatt facility contracted to the French company in 2016. ENGIE said it signed more solar and wind power projects with a combined capacity of 608 MW of peak capacity, with the majority coming from solar energy. (3/13)

The UK House of Commons has released a new report on air pollution that calls for urgent action by national leadership to bring about a change in how the problem of air quality is tackled. The joint inquiry resulting in the report “Improving Air Quality” was launched in 2017 amid concerns about the inadequacy of the UK Government’s plan to improve air quality in the UK. (3/16)

Battery rare earths: Efforts by governments around the world to cut noxious emissions produced by fossil fuel-powered cars are driving demand for electric vehicles and the metals used to make them, such as lithium and cobalt which are key ingredients for batteries. Now the spotlight is on neodymium. Several automakers already use permanent magnet motors that rely on the metal because they are generally lighter, stronger and more efficient than induction motors that are based on copper coils. (3/13)

ENI invests in fusion R&D: Researchers at MIT may have found a way to fast-track the development of fusion energy, and a working pilot plant could be less than 15 years away. The project has attracted one of Europe’s largest oil and gas companies—Italy’s Eni—that has committed funding for research and development.  MIT researchers may have found a way to produce net energy from fusion by the use of high-temperature superconducting electromagnets. (3/13)

Transition lagging badly: Instead of the roughly 1,100 megawatts of carbon-free energy per day likely needed to prevent temperatures from rising more than 2 ˚C, as a 2003 A Science paper from the Carnegie Institution found, we are adding around 151 megawatts. At that rate, substantially transforming the energy system would take, not the next three decades, but nearly the next four centuries. (3/16)

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