Helping America Navigate a New Energy Reality

Peak Oil Review – 19 Sep 2016

By on 19 Sep 2016 in Peak Oil Review

Quote of the Week

““There are few easy answers, but one thing is clear: the current trajectory of climatic change presents a strategically-significant risk to U.S. national security, and inaction is not a viable option.”

Statement by the Center for Climate and Security, a Washington-based think tank, signed by more than a dozen former senior military and national security officials

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 continued to fall last week, closing Friday in New York at $43.39 and $46 in London.  There was considerable news tending to push prices lower. OPEC and the IEA revised their forecasts for the next year and concluded that the imbalance in the oil markets would continue into 2017 vs. predictions that the gap would close this fall. This coupled with increased Iranian production; the possibility that Libya and Nigeria oil production will soon rebound; the report that Bakken shale oil production grew in July and EIA’s admission that US oil production is not falling as rapidly as forecast; all contributed to the weaker oil markets.

On Saturday, the Secretary-General of OPEC said that the meeting in Algiers on September 26-27 to discuss oil prices will be an informal one and that no decisions will be made. Naturally, OPEC, which lives on oil revenues, would like to see them higher, but it is becoming apparent to the markets that no oil exporters are prepared to restrict production at this time. Many traders believe that a price rebound to above $60 a barrel would simply trigger an increase in US shale oil production, wiping out any cuts that OPEC might make.

US crude stocks dropped by an unexpected 560,000 barrels last week, but this was more than offset by a 6 million-barrel increase in total US commercial petroleum stocks. Even a leak in the Colonial pipeline that supplies 40 percent of the gasoline to the US East Coast had little impact on crude prices. Except for local shortages, US crude and gasoline stocks are well above normal and the pipeline is expected to be repaired shortly.

The wave of bankruptcies in the US oil and gas industry is slowing but is still of significant proportions. In January Debtwire published a list of 180 companies, some with billion dollar plus debts, that were at risk of failing. The most recent list says that the number in danger of going under is now down to 135.  However, the forecast continuation of excess supply into next year and dropping prices are not going to help this situation.

The IEA recently issued a report noting that we are now seeing the longest period of decline in investment in the global energy industry in nearly 50 years. The Agency notes that there is a broad shift towards spending on cleaner energy, some of which is being pushed by government policies and the rest by economics.  Goldman Sachs says the decline in investment will not affect production capacity until about 2020 and that we should not expect a major rebound in prices due to oil shortages until then.

2.  The Middle East & North Africa

Iran: Reuters reported that Iran’s crude exports in August were 2.11 million b/d, up 15 percent from exports that were 1.9 million b/d in June and 1.83 million in July. If verified, the August figure is a five-year high.  OPEC says that Iran’s August production was 3.65 million b/d, not far from the 4 million b/d goal that Tehran hopes to achieve by the end of the year.  The Times of India reported that New Delhi’s oil imports from Iran in August were 576,000 b/d up 10 percent from July and at least a 15 year high.

As part of the war of words with the Saudis, an Iranian energy expert warned last week that the policies of Saudi-led OPEC which include pumping oil at record levels might end in environmental disaster. With low prices it will be difficult to lower global carbon emissions. This is interesting coming from an Iranian official. Iran is one of the most vulnerable countries in the world to rising temperatures. Former Iranian officials who understand the problem, but who hold no official position, have noted that parts of the country may become uninhabitable in 10-20 years or less due to high temperatures destroying agricultural production.
At some point Tehran, along with much of the Middle East, will have to acknowledge that they are living on borrowed time and consider the effects of oil production.

Syria/Iraq: The ceasefire in Syria is teetering on the verge of collapse. The US continues air strikes against ISIL targets and other Jihadist groups. Important leaders of ISIL were reported as being killed in coalition airstrikes last week and the US seems to be making progress in systemically destroying oil facilities that ISIL is still using.  The situation in Syria is totally confused with so many countries and groups involved in the fighting. The only thing we can be sure of is that the Syrian economy is being destroyed town by town with no end in sight. The refugee problem is bound to get worse and several international alliances are in a state of flux.

Iraq’s oil production continues to grow slowly but steadily despite the low oil prices. Iraq’s oil is among the cheapest to exploit in the world these days so even $40-50 oil can be profitable. Iraqi Kurds continue to take over ISIL-controlled territory around Mosul as the allies prepare for a massive offensive to take the city. Baghdad is aware that the more territory, especially that which contains oil, the Kurds control the stronger their position will be in any post-ISIL settlement.  The Kurds still claim that some of the land in northern Iraq rightfully belongs to Iraqi Kurdistan and someday a Kurdish nation. There is no end to the squabble in sight unless the whole region is depopulated due to global warming some day.

To make matters more complicated, the oil-rich province of Kirkuk is threatening to split off from Baghdad and join with the Kurds. The City of Kirkuk says it has not been receiving its share of oil revenues.

Libya: It seems hard to believe, but the seizure of four Libyan oil export terminals by forces loyal to the eastern commander, General (now Field Marshal — he was promoted by the eastern government) Haftar may trigger increased Libyan oil exports. The National Oil Company said on Tuesday it will start exporting 600,000 b/d of oil within four weeks and 950,000 b/d by the end of the year. This is well within Libya’s capability which was running at 1.3 million b/d before and just after the uprising.  The National Oil Company is an experienced organization that worked well under Gadhafi and is now working for both Libyan governments. If the pay dispute with the local “security guards” which has held up exports for several years has been offset by the arrival of Haftar’s forces, then there could be some hope for Libyan oil production.  However, there has yet to be a general political settlement in Libya so the plans for increased oil exports could easily become unraveled.

3.  China

The nature of China’s oil industry is changing rapidly, as the government is no longer ordering that aging, high-cost oil fields remain in operation, but is letting economics decide between domestic and imported crude. This has resulted in the closing of many uneconomical oil fields in China and increased reliance on imported oil. The opening of several new refineries in recent years has led to large increases in exports as China’s slowing economy no longer requires all the oil products that the refiners can produce. It now appears that low oil prices are having the same effect on the Chinese oil industry as they had on the US domestic production.

In August China’s oil production was 3.9 million b/d, down by 8.9 percent from August 2015. Lower domestic production and the return of refining capacity from maintenance also led to a 5.5 percent year over year increase in China’s crude imports to 7.77 million b/d during the August. China’s crude oil production is now down 5.7 percent during the first eight months of the year.

Some believe that Beijing has slowed the acquisition of oil for its strategic reserve in recent months. This could be due to a temporary lack of storage capacity for strategic reserves. More capacity is under construction and should be available later this year and in 2017.

A recent Australian study says that the world is failing to appreciate the magnitude of the switch from coal to renewable energy that is taking place in China as the nation tries to clean up its air.  While China is still dependent on fossil fuels for 77 percent of its energy and burns as much coal as the rest of the world combined, it is clearly headed to increased green energy production. The key question is whether this massive coal industry can be shut down in time to save the world’s climate.

4. Russia

While Moscow may seem to be doing well with its meddling in the Middle East and its new-found friendship with Iran, the continuation of low oil prices is creating havoc with its economy. Russia’s Central Bank announced last week that it is forecasting “unstable economic activity” ahead and it sees oil remaining around $40 a barrel. Moscow has also picked up a large economic burden in its support of Syria, where the domestic economic is in ruins. Russia’s GDP was down 0.6 percent year-on-year in the second quarter after falling by 1.2 percent in the first. Some see this as progress.

Moscow is still planning to privatize it major oil producer Rosneft as it struggles with budget deficits that are draining reserves. There has been no movement in the Ukrainian situation and Western sanctions continue.
OPEC said crude oil production in Russia declined to a 13-month low in August because of maintenance at its Sakhalin oil field. Oil production during the first half of the year was higher than during the same period last year and OPEC’s full-year estimate for Russia was revised higher, though year-on-year levels were more or less steady.

5. Nigeria
Exxon is said to be ready to resume shipments of Qua Iboe crude, which averaged about 300,000 b/d last year. Shell is scheduled to restart about 200,000 b/d of shipments that have been shut in by terrorist attacks since last February The prospect of 500,000 b/d returning to the oil markets is already having an impact on prices.

Offsetting the news from Exxon and Shell, however, was a report that the Niger Delta Justice Mandate insurgent group blew up what was described as a “major delivery” pipeline operated by the Nigerian Petroleum Development Company. As usual, government suppression of the details of militant attacks prevents outsiders from assessing the significance of any attack.

S&P has downgraded Nigeria’s credit worthiness to junk due to low oil prices and the reduction in oil production caused by insurgent attacks. S&P said “Nigeria’s economy has weakened more than we expected owing to a marked contraction in oil production, a restrictive foreign exchange policy and delayed fiscal stimulus.”

6. Venezuela

Caracas is making a major effort to refinance its debts by moving $7 billion worth of bonds due in 2017 to 2020 in hopes that oil prices will be higher by then. As an incentive for the deal, the National Oil Company is offering 50.1 percent of its US subsidiary, Citgo, as collateral. Without some agreement on the bonds, the country is likely to fall into default next year adding a new round of problems to its economic woes. Venezuela and its oil company have issued about $110 billion in bonds which could come into default should the whole country collapse.

The Chinese, who have made about $60 billion in loans to Venezuela, in hopes of getting a line into the nation’s vast heavy oil reserves, are having second thoughts. As the country falls into social chaos caused by the lack of food, the security of Chinese citizens and companies operating in the country is coming into doubt as is the possibility that the bonds will ever be repaid.

7.  The Briefs

North Sea oil producers were supposed to be among the first victims of OPEC’s battle for market share. Instead their high-cost, decades-old facilities are proving surprisingly resilient to the price slump. Crude oil and condensate output is likely to continue rising in the UK North Sea until 2018 as projects that were sanctioned before crude’s plunge four years ago start up, according to estimates by industry consultant Wood Mackenzie Ltd. (9/17))
Offshore oil-rig operators, grappling with the biggest industry downturn in a generation, say they finally have the bottom in sight. The problem is, they could be stuck there for a long time. Transocean Ltd., which owns the biggest offshore-rig fleet in the world, believes utilization for floating units will reach bottom toward the middle of next year. (9/16)

Norway has pushed the oil and gas boundaries further north in recent years, opening up the Arctic for drilling. But low oil prices and environmental opposition are forcing a rethink in the Arctic nation. Norway’s government retreated on a plan to open up new parts of the Arctic for exploration. (9/12)

Saudi Arabia has retaken the position of the world’s top oil producer from the US, according to the International Energy Agency. While Saudi Arabia has added an extra 400,000 barrels a day of output from low-cost fields since May, about 460,000 barrels a day of “high-cost” production has been shut down in the U.S. (9/13)

Kashagan oil field has taken 16 years and more than $50 billion to bring to the verge of production. It could take another decade to reach its potential, with initial output at half the forecast level. Eni SpA, working with partners Royal Dutch Shell Plc, Total SA and the Kazakh state, expects Kashagan to start in October and pump 370,000 barrels a day within a year. (9/14)

India’s gasoline consumption is growing rapidly as millions of additional households buy motor cars and especially motorcycles as a status symbol amid growing prosperity. Gasoline consumption averaged 550,000 barrels per day between June and August, an increase of nearly 15 percent from 480,000 bpd a year earlier. (9/16)

Offshore Senegal is among the world’s next hot spots, Australian energy company FAR Ltd.  Said. It is at the dawn of development as no offshore oil exploration has been done in four decades and no deepwater drilling has ever been conducted in national waters. With contingent resources of around 200 million barrels of oil, the company said the SNE oil field offshore Senegal met the minimum threshold to be considered commercial. (9/15)

Argentina, says BP: The Permian Basin has become so hot that some oil companies are starting to stay away, instead looking at frontiers that are less picked over. BP is one such company. The British oil giant’s CEO Bob Dudley said that land in the Permian has become too expensive, and instead he is looking to expand operations in Argentina, where the vast Vaca Muerta shale basin offers appetizing opportunity. (9/16)

While Colombia’s recent agreement to end 52 years of internal war with its largest insurgent group has been heralded across the globe as a rare victory for peace, the nation’s oil industry fears the deal may increase turmoil, not reduce it. Parts of the accord with the Revolutionary Armed Forces of Colombia, or FARC, will amplify the risk of corruption, political meddling and delays to oil projects, according to Campetrol, the Colombian chamber of oil goods and services. (9/14)

Two new discoveries by Pemex made off the eastern coast of Mexico have the potential to produce more than 20,000 barrels of oil per day, the state energy company said. (9/15)

In Canada, Prime Minister Justin Trudeau plans to approve at least one new oil pipeline project in his first term, with Kinder Morgan Inc.’s Trans Mountain expansion to the Pacific Coast the most likely candidate. The prime minister is seeking to strengthen environmental standards and build confidence in new regulatory rules while also stoking growth in Canada’s sluggish economy by backing a pipeline. (9/14)

Three new oil sands developments in the Fort McMurray area could should cost roughly $3 billion and add up to 95,000 barrels of oil per day to current output. Two of the new developments rely on steam stimulation. They each fall under a new scheme aimed at limiting the amount of greenhouse gas emissions associated with oil sands developments. (9/17)

The US oil rig count rose by two to 416, according to oilfield-services giant Baker Hughes on Sept 16. The tally of gas rigs fell by three to 89, and miscellaneous rigs fell by one, taking the total count down two to 506. (9/17)

Oil influx: After avoiding Gulf of Mexico ports because of tropical storm Hermine, crude oil tankers flooded the region, pushing oil imports to the highest week-on-week increase since December 19, 2014. (9/15)

North Dakota oil production rose slightly in July, stabilizing after a drop in the previous month to more than two-year lows, according to the latest data from the state’s Department of Mineral Resources. (9/17)

Counting DUCs: Starting this month, EIA’s Drilling Productivity Report (DPR) includes monthly estimates of the number of drilled but uncompleted wells (DUCs) in the seven DPR regions. Current EIA estimates show DUC counts as of the end of August totaling 4,117 in the four oil-dominant regions (Bakken, Eagle Ford, Niobrara, and Permian) and 914 in the three natural gas-dominant regions (Haynesville, Marcellus, and Utica) that together account for nearly all U.S. tight oil and shale gas production. In the oil regions, the estimated DUC count increased during 2014 and 2015, but the count declined by about 400 over the past five months. (9/15)

Bankruptcies: Last year, Moody’s said there were 17 oil and gas companies that went bust and 15 of those were working in the exploration and production side of the industry. This year, bankruptcies for exploration and production companies have accelerated, with the number so far nearly twice the figure for 2015. (9/14)

Zombie oil co trend: Beneath the surge in corporate defaults lies a surge in distressed exchanges. Such exchanges — defined by Moody’s Investors Service as when a troubled company offers its lenders new or restructured debt, securities, cash, or other assets, that amount to a smaller commitment than the original IOU — could have big implications for debt markets as they stretch out the current credit cycle and result in even greater losses for investors. (9/14)

The US Department of Energy is considering retaking operational control of the St. James marine terminal in Louisiana once a 20-year lease with Shell expires at the end of 2017. DOE officials may spend $2 billion to upgrade and modernize the infrastructure used to distribute government-owned crude oil from the Strategic Petroleum Reserve during potential supply shocks. (9/16)

A federal appeals court on Thursday rejected Chesapeake Energy Corp’s effort to avoid having to pay $438 million, including interest, to investors in a bond dispute. (9/16)

Pitched pipeline battle: Industry leaders said moving forward with the Dakota Access pipeline is central to keeping the US shale oil sector a strong component of the national economy. Federal government agencies intervened last week after a district court ruled in favor of the pipeline construction, calling for a temporary halt to construction on parts of the pipeline until the Army Corps of Engineers can determine a full range of environmental and other federal policies. The Standing Rock Sioux Tribe said the pipeline threatens sacred tribal lands and the water supply for residents in the region. (9/15)

Exxon probe: New York Attorney General Eric Schneiderman’s probe into Exxon Mobil Corp. includes scrutiny of why it didn’t write down the value of oil fields during a global collapse in prices that prompted billions in write-offs by rival drillers. The avenue of inquiry is related to larger questions of whether Exxon knew decades ago about the dangers of climate change and failed to alert investors to the financial risks it could pose to the world’s biggest oil explorer. (9/17)

Oklahoma regulators, working in coordination with federal authorities, closed down more wells in the state in response to an early September earthquake. A study from the USGS found the disposal of oil and gas-related wastewater is the “primary reason” for an increase in seismic activity in central states like Oklahoma. (9/14)

Colonial Pipeline Co. had a leak near Birmingham, Alabama that spilled more than 250,000 of gasoline. They don’t expect to fully reopen its primary gasoline pipeline until sometime this week. The pipeline is used to send gasoline from refineries on the Texas Gulf coast to states in the Southeast and along the East Coast, so prices might be slightly higher in the short term. (9/17)

Anadarko Petroleum Corp. is diving even further into deepwater Gulf of Mexico with a $2 billion acquisition of assets from Freeport McMoran Oil & Gas, the company announced Monday. The deal expands Anadarko’s infrastructure throughout the Gulf of Mexico and increases its cash flow, which the company says it will use to accelerate drilling programs in the Delaware and DJ basins. (9/13)

France’s Total has beaten a private equity firm to Chesapeake Energy’s Barnett shale assets. The deal suggests that there may still be a future for Barnett shale, considered by many observers to be a goner as production has declined substantially in the last couple years thanks to the drop in gas prices. (9/13)

Britain gave the go-ahead on Thursday for a $24 billion nuclear power plant (Hinkley Point C project), ending weeks of uncertainty that strained ties with China and France and put a question mark over Prime Minister Theresa May’s investment policy. (9/15)

Since the accident at Fukushima Daiichi in March 2011 and the subsequent shutdown of nuclear reactors in Japan, five reactors have received approval to restart operations under the new safety standards imposed by Japan’s Nuclear Regulation Authority. Only three of those reactors are currently operating. Applications for the restart of 21 other reactors, including 1 under construction, are under review. (9/14)

Renewables provided more bang for the buck last year because the cost of installations and financing declined, helping reshape the direction of the energy industry for decades to come, the International Energy Agency said. Solar costs have plunged 60 percent on average since 2010. The capacity of new renewable-energy installations coming online surged 40 percent in five years even though investment in those technologies slid 2 percent to $288 billion. (9/14)

The solar industry installed 2,051 megawatts between April and June, marking the eleventh consecutive quarter in which the U.S. saw more than a gigawatt of solar capacity added to the grid. The volume of installations also marks 43 percent growth from the same quarter in 2015. We’re seeing the beginning of an unprecedented wave of growth that will occur throughout the remainder of 2016, specifically within the utility PV segment. (9/13)

Renewables barrier? The United States on Wednesday unveiled a long-awaited plan for desert renewable energy development that the solar and wind industries said unfairly favors land conservation and severely limits the ability to build projects critical to meeting the nation’s climate goals. (9/15)

In China, a new high-speed railway line between Zhengzhou, capital of central Henan Province, and Xuzhou in eastern Jiangsu Province started its operation on Saturday, making the total length of high-speed track in the country over 20,000 km. Trains running on the 360-kilometer-long track travels at a speed of 300km per hour at the early stage of operation. (9/13)

EV breakout: This week a century-old Detroit automaker, General Motors Co., not Tesla, unveiled the latest breakthrough electric car. The 2017 Chevy Bolt and its 238-mile range rivals that of Tesla’s Roadster and at a third of the price. The Bolt’s $37,500 sticker price isn’t exactly “affordable” for the average American buyer, but in terms of range per dollar spent, GM just bested every other electric vehicle on the market, including the full lineup of Teslas. (9/17)

E-Bus: Proterra unveiled the newest addition to its fleet of electric buses: the Catalyst E2 series, named for its Efficient Energy (E2) storage capacity of 440 – 660 kWh. Last month, an E2 series vehicle achieved a new milestone by logging more than 600 miles (966 km) on a single charge under test conditions. Its nominal range of 194 – 350 miles means the Catalyst E2 series is capable of serving the full daily mileage needs of nearly every US mass transit route on a single charge (9/13)

In southern Louisiana, torrential rains unleashed in August were made almost twice as likely by human-caused climate change, according to a quick-fire analysis released just weeks after the flood waters subsided. (9/16)

The effects of climate change endanger U.S. military operations and could increase the danger of international conflict, according to three new documents endorsed by retired top U.S. military officers and former national security officials. (9/14)

California’s Gov. Jerry Brown signed trailblazing legislation last week that commits the state to audacious greenhouse gas emission reductions by 2030 of 40 percent below 1990 levels. Not surprisingly, longstanding critics from the business community were howling once again about how California’s business climate will deteriorate as a result. (9/12)

 

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