Tom Whipple, Editor
1. Oil and the Global Economy
2. The Middle East & North Africa
5. Quote of the Week
6. The Briefs
1. Oil and the Global Economy
New York oil prices which were little changed during four trading sessions last week closed Thursday at $104.30. London oil climbed by $2 a barrel early in the week, but then settled around $109.50 as the Ukrainian situation seemed to be stabilizing. The conventional wisdom concerning the 10 million barrel jump in US crude stocks the week before last says that the event was an anomaly due to an unusual number of tankers unloading in one week. The record size of the crude stocks along the Gulf coast has refiners looking at using more barges to move the crude to east coast refineries as the tankers that are legal under the Jones act are fully booked.
US natural gas prices saw their biggest one-day increase in two months on Thursday after the EIA reported that only 24 billion cubic feet of natural gas was injected into storage caverns vs. the 34 billion analysts had been expecting. Last week saw still more cold weather across the US, suggesting that this week’s report will again show a build in natural gas inventories well below normal for this time of year. Concerns are growing that the US will not be able to store enough natural gas this summer to get through another cold weather.
Most analysts expect that the US natural gas production will grow this year, but point to increasing demands from exporters and power companies. Replacing the 3 trillion cubic feet withdrawn from storage last winter will be a tall order. Some of the new shale gas is coming from wells that do not have good pipeline access to urban consumers or storage facilities. In North Dakota some gas is still being flared, while in the northeast some isolated gas is being sold at reduced prices to power companies that find it more economical than coal. This phenomenon may be removing as much as 3 billion cubic feet a day from the gas that would otherwise be going into storage.
While there is a glut of crude in parts of the US, gasoline stocks have been falling steadily for the last eight weeks, NY gasoline futures closed at $3.05 on Thursday which is some 25 cents a gallon higher than were they were in February. The AAA says regular is retailing in the US for $3.67 a gallon, up 14 cents in the last month and 10 cents higher than this time last year. Analysts are worried that stocks will not be refilled in time for the summer driving season and that retail prices could move still higher. US refiners have a significant advantage in selling gasoline abroad as their cost of crude is generally below world prices; they have mostly modern efficient refineries; and can use cheap natural gas to refine the crude. US exports of gasoline and distillates have increased substantially in recent years.
2. The Middle East & North Africa
Iran: There was little progress in the nuclear standoff as the talks are in recess. The IAEA says that the Iranians are keeping up their obligations under the interim treaty and have neutralized half of their stocks of highly enriched uranium. Tehran, however, is seeing little relief from the economic sanctions under the interim agreement which has another three months to run. Iranian leaders are sending mixed signals with some expressing optimism about a settlement soon and others resorting to the same nationalistic rhetoric which has sustained the country for the last 35 years. President Obama signed a law banning Iran’s new UN ambassador from entering the US because of his participation in the seizure of the US embassy in Tehran in 1979.
Iraq: As the 30 April parliamentary elections draw near, Sunni insurgents are stepping up their attacks across the country in hopes of destabilizing the government. AFP figures say that more than 460 have been killed this month and 2,700 since the first of the year. More than 9,000 candidates are vying for the 328 seats up for elections. There will be no voting in those districts of Anbar province held by the insurgents. The Sunni insurgent’s hold on Fallujah seems to be increasing despites Baghdad’s best efforts to dislodge them and there is talk of attacks into Baghdad.
With Baghdad’s crude oil export pipeline to Turkey out of commission, the insurgents are turning to other parts of the northern Iraqi oil infrastructure. The pipeline bringing crude to the Baiji refinery has been blown up and the head of the Haditha refinery has been kidnapped. Some 1.5 million barrels of oil that the Kurds have pumped into Turkey will be released for sale under a new agreement between the Kurds and the Turks. The revenue will be shared between Erbil and Baghdad with the majority going to the Central government if at least 100,000 b/d is pumped through the pipeline.
Iraq seems to be approaching another turning point in which its continued existence as a single state is at stake. The possibility remains that the political structure that the US left behind at the cost of 4,200 American lives and $2 trillion will not last and the country will disintegrate in along tribal and religious lines. So far the increasing flow of cheap-to-exploit oil from the southern provinces has not been harmed, but as the turmoil spreads closer to Baghdad, there is bound to be more targeting of the southern oil infrastructure which is the source of the government’s strength.
Libya: The first tanker in eight months was loaded with 800,000 barrels of crude at the port of Hariga last week. Hariga, however, is a small port and it may take a week or so to accumulate another tanker-load for shipment. So far the oil being exported is only a small fraction of the 1.4 million b/d that was being exported before shipments dropped to the current 150,000 b/d. There is talk that a second smaller port at Zueitina and the larger terminals at Ras Lanuf and Es-Sider will be opened soon. This likely depends on whether some sort of revenue agreement can be reached with the local militias controlling the ports.
In the meantime, turmoil continues across the country with the kidnapping of the Jordanian ambassador last week. The new acting Prime Minister declined to form a new government after an attack on him and his family by militiamen. It is hard to see that there is much central government these days.
Tripoli is considering instituting a system of “smart cards” to control the distribution of heavily subsidized gasoline much of which is smuggled into Tunisia for resale and much higher prices. The system will restrict the amount of subsidized gasoline that can be purchased with additional amounts selling for world prices. Gasoline and diesel consumption in Libya grew by 15 percent between 2012 and 2013 most of the increase is attributed to smuggling.
As the weeks roll by, it is becoming clearer that major changes are underway in China which is apt to have an impact on its energy consumption and economic growth in the years ahead. After 40 years of unprecedented growth and increase in fossil fuel consumption at the expense of the environment, the good times came to an end last year when it became obvious that much of China was so polluted that human life was endangered.
Much of China’s boom was supported by a phenomenal growth in coal consumption which rose from 300 million tons annually in 1970 to 4.3 billion tons last year. Until recently, annual growth in coal consumption in has mostly ranged in the vicinity of 10 to 20 percent a year, dwarfing efforts in the rest of the world to cut back on carbon emissions and discouraging those countries that were making carbon control efforts.
In the wake of China’s 2013 “Airpocalypse,” however, in which pollution reached near-lethal levels in several major cities, there have been major changes in policies. Last fall the Chinese government released a new plan recognizing that significant reductions in coal consumption will have to take place if the country is to avoid an environmental disaster. The government is now committed to reducing coal consumption within the next four years. If these plans are implemented there will be significant changes in the way China gets its energy. Beijing for example is to cut coal consumption by 50 percent in the four years.
While spectacular growth in coal consumption is likely over, at 4.3 billion tons annual consumption even relatively small growth rates of 2 or 3 percent a year still amounts to a lot of carbon going into the atmosphere. China is still projected to be consuming some 5 billion tons annually by 2020. To offset the loss of growing coal consumption, Beijing is making major strides in developing renewables, solar, wind, hydro, and building more nuclear power stations. It also plans major increases in natural gas consumption. Thus the key issue for the remainder of the decade is whether China can maintain economic growth rates on the order of 7.5 percent a year while cutting back on coal.
It is important to note that while Beijing seems to have a lingering concern about carbon emissions and climate change, the proximate cause of the new policies is unbreathable air and ever increasing soil contamination, which already has left some 20 percent of China’s agricultural land too polluted for growing crops safely.
The word from Beijing is that a new environmental protection law will be published later this year, which will for the first time prioritize the environment over economic growth. This law will be a major change in the way the Peoples’ Republic does business.
Last week, Beijing revealed that its economic growth slowed to an 18-month low in the first quarter. While some of this is clearly due to lower exports, a reduction in the rate at which new power plants are being brought on line is obviously contributing to the slowdown in growth.
Where China’s oil consumption goes in the effort to clean up the environment remains to be seen. While there has been an effort to cut car use in the major cities, new cars are still being sold at prodigious rates as increasing wealthy Chinese motorized their society as the US and later Europe did after World War II. Even a modest growth rate anywhere near 7 percent is going to require increasing oil and natural gas imports to keep the society functioning.
Despite an agreement reached in Geneva last week between Russia and the western powers to calm the Ukrainian situation, pro-Russian separatists in eastern Ukraine are not leaving the government buildings they have occupied and are daring the Ukrainian government to attack them. The separatists expect that Moscow will come to their aid with its superior armed forces and separate eastern Ukrainian provinces from the rest of the country as happened in Crimea. The separatists consider the current Ukrainian government that resulted from the ouster of the pro-Russian president as illegal and are calling for a referendum which they hope will give them independence from Ukraine.
Threats and counter threats between Russia and the west continue to be exchanged, some of which involved sanctions on the gas and oil flowing from Russia to Europe. Europe gets 25 percent of its natural gas from Russia so any reduction to this flow would result in economic hardships to both sides. For this reason Moscow and the EU in their official pronouncements continue to hold that natural gas would be exempt from any sanctioning or counter sanctioning that may result from the situation.
For now, the Organization for Security and Co-operation in Europe has been placed in charge of defusing the tensions with little progress being reported. So long as this impasse continues, world oil prices are likely to be affected.
4. Quote of the Week (from the archives)
From the US EIA’s Natural Gas Weekly Update, October 30, 2013
- “The US Energy Information Administration forecasts that reduced natural gas consumption from electric generators (power burn), driven by higher gas prices, will play an instrumental role in pushing down total natural gas consumption this winter (November 2013 to March 2014) compared to last winter (November 2012 to March 2013)…Both residential and commercial consumption, which typically combine to account for more than 40 percent of total natural gas consumption in winter months, are forecast to decrease slightly, with temperatures expected to remain relatively flat compared to last winter.”
[NOTE: US natural gas in storage at the end of this much colder-than-average heating season was only 50% as much as the gas in storage last year at this time.]
5. The Briefs
- Russian gas giant Gazprom has sent the first cargo with crude produced at the Prirazlomnoye offshore field — the country’s only Arctic offshore hydrocarbon project — to the international market. (4/19)
- Shell plans to expand the Sakhalin-2 oil and gas project in Russia’s Far East, the country’s only producer of liquefied natural gas, as it seeks to boost its presence in the Asian energy market. (4/19)
- Nigeria’s total crude exports declined by 13.5 percent between December 2012 and December 2013, leading to a loss of $1.1 billion, due largely to a 90 per cent drop in crude oil exports to the US. (4/15)
- In Nigeria, the US Ambassador said the Washington is willing to help Nigeria tackle crude oil theft. (4/19)
- Nigeria’s four oil refineries averaged 26 percent capacity utilization for the month of December 2013. While that is a significant improvement from the 6.5 percent average capacity utilization in November, it is a slight decline from the 31 percent utilization year on year to December 2012. Thus fuel shortages continue in Nigeria. (4/15)
- PetroChina will purchase the 40 percent stake it doesn’t already own in an oil-sands operation in northern Alberta. The move completes a 2010 deal that initially gave PetroChina a 60 percent stake in the 250,000 barrel-a-day project, known as Dover. (4/19)
- China’s Sinopec agreed to pay about $1.2 billion to buy a 50 percent stake in energy assets in Kazakhstan from Russia’s OAO Lukoil. The deal is expected to be completed before the end of the year. (4/15)
- Canadian oil exports were 1.5 percent higher for the first two months of 2014 than the same period in 2013. Nearly all of Canadian oil exports head to the US where oil imports from Canada have increased from 16 percent of total oil imports in 2005 to 32 percent in 2013. Canadian Prime Minister Stephen Harper is trying to diversify exports by courting Asian consumers. (4/17)
- The total US rig count was unchanged this week at 1,831, according to Baker Hughes. Oil rigs declined by seven to 1,510. The gas count increased by six to 316. The total count gained 52 rigs in the first quarter as producers ramped up drilling in shale formations from North Dakota to Texas. (4/18)
- The American Petroleum Institute said US petroleum product deliveries increased 0.4 percent year-on-year to average 18.6 million b/d last month, the highest level for March since 2011. For the quarter, however, total petroleum demand actually declined 0.3 percent compared with the same time last year. (4/19)
- The US Energy Department approved exports from a liquefied natural gas plant near Kenai, Alaska. ConocoPhillips can send as much as 40 billion cubic feet of natural gas per year from the Alaskan facility to Asian countries that don’t have a free-trade agreement with the US. (4/16)
- The upstream oil and gas economy in Texas ventured further into uncharted territory in February as rapidly increasing production, higher wellhead prices, and revised statewide employment numbers boosted the Texas Petro Index to a record 300.6. Texas producers increased oil output by more than 22 percent in February compared to February 2103, and natural gas production was up about 1.0 percent. (4/19)
- Worker scarcities in the oil patch are pushing up costs and slowing construction projects. The unemployment rates of Texas (5.7 percent) and Louisiana (4.5 percent) are below the national average of 6.7 percent. The lowest jobless rate of any area in the US in February was 2.8 percent in Houma-Bayou Cane-Thibodaux, Louisiana, because of offshore-oil exploration in the Gulf. (4/17)
- Illegal dumping: hundreds of “oil sock” filters of low-level radioactive material were found in an abandoned building in Noonan, North Dakota. It is likely the largest case of illegal dumping in state history. (4/19)
- US banks should be banned from owning commodities businesses because they could threaten the institutions and global supply chains, Senators Sherrod Brown and Elizabeth Warren told the Federal Reserve. (4 /17)
- US light duty vehicle energy use is projected to decline from roughly 8.3 million b/d last year to between 6.7 and 5.3 million b/day by 2040, for a variety of economic, demographic, technological, social, and environmental reasons. (4/17)
- Chinese auto makers Chery, Geely and Great Wall are facing intense competition from General Motors, Volkswagen and other global rivals. The local brands have suffered shrinking sales and market share this year while China’s overall auto market has grown. China is the world’s biggest auto market, with 2013 sales rising 15.7 percent from 2012 to 17.9 million vehicles. That growth is forecast to slow to between 8 and 10 % this year. (4/18)
- In China, one-third of the tap water used in Beijing in five years will be desalinated seawater. Beijing has been battling drought for 15 years as China works to clean its water and air of pollutants. (4/16)
- In Brazil, a major drought has cut grain and coffee production. A climate study with projected warming trends shows Brazil’s soybean production may drop by as much as 24 percent and wheat output as much as 41 percent by 2020 as climate change reduces areas where the crops can grow. (4/18)
- Without aggressive action now, it will be hard to keep greenhouse gas emissions in check, US Energy Secretary Ernest Moniz said. A report from the Intergovernmental Panel on Climate Change warns international efforts to reduce carbon emissions are short of what’s needed to keep expected -]temperature increases in check. (4/15)
- A federal appeals court on Tuesday upheld the nation’s first-ever national standards requiring power plants to cut emissions of mercury and other hazardous air pollution. The federal rules, scheduled to take effect in April 2015, require the nation’s 600 coal and oil-fired power plants to comply with emissions limits set by the EPA. (4/16)
- Utility Southern is building the first large-scale power plant in the US designed to transform coal into gas, capture the carbon dioxide and pump it underground. The 582-megawatt Kemper project, scheduled to start operation later this year has a price tag of $5.2 billion, making it one of the most expensive power plants ever built. The plant will end up costing more than $6,800 per kilowatt. By comparison, a modern natural-gas plant costs about $1,000 a kilowatt and a nuclear plant costs about $5,500.
- Kemper is the only major clean-coal power plant funded by the US DoE that has so far broken ground. Other projects have been scrapped, delayed or are facing funding woes that may doom them. Yet utilities are going ahead with plans to shut coal-fired plants. In 2011 and 2012, coal units capable of generating 14 gigawatts of electricity were shuttered. Another 63 gigawatts — more than a fifth of coal powered capacity — may disappear by 2017 because of rules curbing mercury and other pollutants. (4/15)