Helping America Navigate a New Energy Reality

Peak Oil Review – 22 Aug 2016

By on 22 Aug 2016 in Peak Oil Review

Quote of the Week

“The notion of ‘rig productivity’ has to be taken with caution.  We can’t assume that the best-posted performance in the field is the norm for all wells…There is a statistical distortion at play. Starting in late 2014, the severe downturn in oil prices forced the industry to park three-quarters of their rigs and ‘high-grade’ their inventory of prospects. Producers focused on only their best rocks, drilling with only the most efficient rigs. All the low productivity stuff was culled out of the statistical sampling, skewing the average productivity numbers much higher.

Peter Tertzakian, Chief Energy Economist, and Managing Director at ARC Financial Corp

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 climbed another $3 a barrel last week as traders continued to hope that not only will OPEC and Russia agree to a production freeze next month, but that it will eventually result in the elimination of global oversupply and reduce global stockpiles to a normal level.  The week closes with New York futures at $48.52 and London at $50.88.

Most analysts doubt that a freeze agreement can be reached as Iran and Iraq have hopes of substantially increasing their oil production in the next couple of years.  Most of the other OPEC members are pumping as fast as they can and have little prospect of substantial production increases in the next few years. Libya and Nigeria currently are pumping way below capacity due to political problems and are unlikely to agree to a freeze that does not allow them to return to their previous highest production level.  Last spring when OPEC could not agree on a freeze, the cartel was pumping some 33 million b/d. It is now pumping about 34 million b/d. Some analysts have noted that should the Nigerian and Libyan situations be settled, world oil production could increase by another million b/d in the near future.

While oil prices back in the vicinity of $50 a barrel have been enough to entice many rigs back into production in the US, it is still well below the levels need to attract the major oil companies back into expensive projects, most of which would be deepwater these days.  A few companies still in reasonable financial shape have increased drilling, but most of the surge in the US rig count has been based on hopes of much higher prices, using other people’s money.

Most still believe that overproduction will fade in the second half of this year and that prices will gradually climb to average in the mid-$50s next year and the mid-$60s in 2018. There are several factors that could upset this calculation such as a revival of US shale oil production, an increase in US interest rates, or weaker-than-expected Chinese demand.

In its weekly reports, the EIA has been overestimating the pace at which US production has been declining. When the time came to issue its most recent monthly report, which is based on better data, the Administration was forced to list US production as having jumped by 152,000 b/d. This increase did not actually occur but was simply a bookkeeping procedure. It does, however, confirm that US production has not been falling as fast as the weekly estimates suggest despite the large reduction in the US rig count.

2.  The Middle East & North Africa

Iran: The issue of whether Iran will participate in the “production freeze” meeting that is to take place in Algiers in late September is still up in the air. Iran’s refusal to participate in a similar freeze last spring led to the collapse of the meeting. Tehran does not expect to reach what it considers to be its rightful level of production within the next month suggesting that it will not agree to any freeze. Considering the increasing level of hostility between Iran and the Sunni Arab states in the region, it seems highly doubtful that Tehran will be a party to any freeze agreement.

The major news last week was that Iran is allowing the Russians to use one of their airfields to bomb the insurgent forces fighting to overthrow the Assad government in Syria. Tehran also announced that it had formed a “Liberation Army” to help fellow Shiites who are essentially fighting against Sunnis, and occasionally Israelis, in Syria, Iraq, Yemen, and Lebanon. Iran also said that much of the efforts of its new Liberation Army will be in supporting local forces rather than by suffering casualties by directly participating in the fighting.  Last week Tehran announced that 400 of its men have been martyred in Syria. It seems that many of these were Shiite Afghans who were recruited to fight for the Shiite cause.

Tehran says it is about to start its natural gas exports to Iraq next month. The new pipeline will initially supply some 7 million cubic meters of gas a day to power plants around Baghdad, but this will expand to 70 million when the pipelines are opened to Basra next year. Iran’s natural gas production from the giant South Pars field is currently about 430 million cubic meters a day which is expected to rise to 540 million next year. The Iranians have been seeking export markets for their increasing production of natural gas which is way beyond what they can consume domestically. One plan involves piping gas to Qatar where large LNG compression plants are already in operation. Other plans involved piping the gas to the EU via Turkey.

Syria/Iraq: The situation around Aleppo continues to deteriorate with Moscow now using heavy bombers to attack rebel positions and more importantly civilian targets. The Russians seem to see any town not supporting the Assad government – which includes most of northern Syria – as fair game for attacks. The situation took a turn for the worse last week when Syrian government airstrikes came close to US special forces supporting the insurgency.  These prompted warnings that the US would retaliate for any attack on US forces.

The reason for the stepped-up Russian involvement which included firing cruise missiles at targets in Syria from ships in the Mediterranean may be that the fighting around Aleppo may not be going so well for the Assad government. After weeks of advances behind a rain of indiscriminate Russian bombing of whatever was in the way of government forces, the insurgents in Aleppo are reported to be holding their own or even attacking the coalition of Syrian Shiites and draftees, Hezbollah volunteers and Iranian “liberation” forces.  Heavy fighting is taking place is several sectors of Aleppo where the humanitarian situation is reaching record proportions even for Syria.

The stepped up Russian involvement may be a sign of more trouble ahead. With Moscow more deeply involved on the side of the minority Shiites, the region seems to be on the way to many more years, if not decades, of increasingly bitter hostilities.

Iraq had a better week. The country now has a new oil minister after weeks of squabbling over who should have the post. With oil prices slightly higher, the government is talking about increasing investment to increase production which, of course, will send oil prices lower.

The new oil minister, Jabar Ali al-Abadi seems to have made some a settlement with the Kurds, for the Northern Oil Company fields, which are now largely under Kurdish control, began pumping oil out of the country via the Kurds’ pipeline to Turkey. The flow started at 70,000 b/d but is expected to increase to 150,000 b/d next week. An equitable division of revenue is something that should be achievable. The Kurds seem to have the upper hand at the minute. As the only viable fighting force against ISIL, they have been receiving considerable US support and are currently leading the attack to retake Mosul from ISIL.

The Islamic State’s oil resources took another hit last week when a convoy of 25 oil tankers was hit by US air strikes and destroyed. As ISIL’s military assets are gradually destroyed by attacks from several of the world’s best air forces, it will soon be unable to hold much territory. The US is predicting the fall of Mosel by the end of the year.  Some fear that the end of an organized ISIL will simply lead to other forms of Shiite – Sunni conflict.

Libya: The battle for Sirte seems to be coming to an end with the remaining IS forces fleeing, fighting to the death, or launching suicide attacks against government forces. No longer able to hold territory, the remnants of the Islamic state are expected to disperse across the country and continue their insurgency indefinitely.

The major oil news of the week was the resumption of shipments from the oil port of Zueitina for the first time in ten months. The port has been closed due to a pay dispute with local security guards. For now, it is difficult to tell if real progress will be made in increasing oil exports to the extent it will impact the global oil markets or whether the tribal bickering will continue indefinitely.

Saudi Arabia: The Saudis increased their combined crude and oil product exports to 8.83 million b/d in June, the highest exports on record for the month when much crude must be consumed to support air conditioning. Total crude production was up to 10.55 million b/d. This surge in production may have an impact on Saudi willingness to join in some sort of production freeze next month. It is doubtful if the Saudis can push production much higher on a sustained basis. There are many other issues involved in the production freeze, the most important of which is Tehran’s position. Even if there is no agreement, the Saudis have earned themselves some $90 million a day in increased oil revenues just by hinting that an agreement, no matter how meaningless, may be in the works.

US-Saudi relations took a turn for the worse last week as the Saudis continue their indiscriminate bombing of civilian targets in Yemen with aid from Washington. The UN says that some 6,500 have been killed since the fighting started and that 80 percent of the population need humanitarian assistance. The suspension of the Yemeni peace talks on August 6th resulted in a stepped up Saudi bombing campaign that has killed at least 40 civilians. Doctors Without Borders have withdrawn the staffs from six hospitals after a Saudi air strike hit one of its buildings killing 19. Over the weekend Saudi planes bombed a hundred-thousand-person demonstration in Sanaa supporting the Houthi and their allies that control the city.

Washington has reduced the number of US advisors helping the Saudi air campaign from 45 to 5 as the US media starts to ask questions about US complicity in attacks on innocent civilians. US support for the Yemen war is said to be in response to Saudi acquiescence in the Iran nuclear agreement and the large amounts of military equipment the US is selling to the Saudis.

While the Yemen war no longer has a direct impact on Middle Eastern oil exports, it is a symbol of the increasing violence in the region which could eventually lead to a scale of turmoil that could reduce oil shipments as has happened in other places.

4. Russia

The news last week was mostly about Moscow’s agreement to talk with OPEC about a production freeze. In recent years Moscow has been able to inch its production higher setting new post-Soviet records, but this has required a considerable effort that may be difficult to continue. The extremely weak ruble has been of significant help. Moscow would naturally like to see higher oil prices to help its battered economy, but as its political/military relationships with the rest of the world become more complicated, an oil production freeze is not an important topic.

The use of Iranian airfields and improved relations with Turkey have many hailing the great gains Moscow is supposed to be making in the Middle East.  Moscow was also accused last week of helping the Syrians drop napalm on rebels in the Damascus suburbs. Russia is still suffering from a weak economy which the IMF says will continue to contract this year. While President Putin may be enamored with foreign ventures that make it appear his country is regaining the superpower status it enjoyed under the Soviet Union, times have changed. Russia is a much smaller place that has fallen behind in nearly every field but oil production and military hardware.

Ratcheting up tensions and skirmishes in Ukraine may be good domestic politics, but will not help relations with the EU that is doing its best to find other sources of energy forcing Moscow to turn to the Chinese to sell their oil. As John McCain famously said, “Russia is nothing but a gas station masquerading as a country.”

Last week the privatization of a mid-sized oil producer, “Bashneft,” was unexpectedly postponed. The sale of the state-owned company was supposed to provide the government enough revenue to get through a troubled year. Some say the postponement was due to a power struggle among President Putin’s inner circle as to the proper balance of state-owned vs. private oil companies.

5. Nigeria

On Saturday, the Niger Delta Avengers announced that they would observe a cessation of hostilities while negotiating with the government. The insurgent group has caused considerable damage to the Nigerian oil industry in the last few months, bring production down by at least 700,000 b/d and possibly more. In recent weeks, new militant groups have emerged claiming to have carried out damaging attacks on oil facilities. Whether all the groups involved in blowing up pipelines are included in the ceasefire is unknown.

A few years ago, a similar ceasefire which resulted in the government paying protection money to the militants to stop the attacks was successful. At the time, however, oil was selling above $100 a barrel, and there was plenty of money to pay bribes.  Low oil prices forced the government to stop paying for protection last winter, and this led to a revival of a new round of attacks.  When the federal government first discovered how much money it could make from selling oil, it broke the original agreements concerning revenue sharing with local governments and kept the lion’s share for itself. This, in turn resulted in a massive spate of corruption with billions of dollars being siphoned out of the revenue stream for politicians in power.

If an agreement is reached to stop the attacks, it remains to be seen if Nigeria can regain market share in the face of the global oil glut and other countries trying to increase their market share.

6. Venezuela

There is still no good news. Last week Columbia University’s Center on Global Energy Policy called Venezuela “a growing supply risk for the oil markets in 2017.”  The implications are that Caracas’s oil industry could come to a complete halt thereby removing another 2.1 million b/d from the global market. This should be enough to bring the global oil markets into balance and push oil prices substantially higher.

Investment in the oil industry has declined in recent years. Halliburton and Schlumberger have cut back substantially on their operations due to lack of payment. The number of oil rigs in operation has dropped by a third in the last year.

The opposition has called for a massive political demonstration to protest the government’s foot-dragging on a recall election. As the military grows in power, now that it is in charge of food distribution, there is a question of whether the armed forces will attempt to suppress the demonstration. In the meantime, the food situation continues to get worse.

7.  The Briefs

Norway’s Statoil said Friday it planned to spend more than $100 million to tap into the new Byrding oil and gas discovery in the North Sea. (8/20)

In the Caspian Sea, a BP subsidiary announced it reached a landmark for oil pulled from Azeri waters with its 3 billionth barrel. BP’s regional office for Azerbaijan, Georgia, and Turkey began work at the supergiant Azeri-Chirag-Gunashli oil field in the Caspian Sea in 1997. (8/18)

Afghanistan may have significant oil and gas riches—the USGS estimates 59 Tcf resources in the ground—but opium still rules this economy amid a lack of any real investment in getting oil and gas out of the ground. In 2011 opium production represented just under 50 percent of Afghanistan’s Gross Domestic Product. Since then, the nation has set new opium cultivation records. (8/16)

Iran aims to resume oil swaps, which were halted in 2012, with its neighbors sharing borders with the Caspian Sea. Iran has the capacity to swap about 120,000 barrels of oil per day, though planned expansions to port facilities could raise that volume to 1.5 million b/d. (8/18)

Offshore Israel, exploration is set to resume in the coming months after a hiatus of several years with a new foreign player, Energean Oil and Gas, expected to enter the market following its acquisition this week of the Karish and Tanin gas reservoirs from Israel’s Delek Group. (8/19)

Australia is on track to become the world’s biggest liquefied natural gas (LNG) exporter by 2019 yet faces a looming shortage at home as states restrict new drilling onshore and cash-strapped oil and gas companies cut spending. (8/15)

Offshore Ghana, one of the bigger oil projects off the coast of West Africa has started production from a floating facility, Tullow Oil announced Thursday. Production from the oil field complex should gradually move up through the year to the floating facility’s peak capacity of 80,000 barrels of oil per day. (8/19)

Bolivia, one of the poorest countries in Latin America, has begun shipping lithium to China in what is considered the first step towards fulfilling its ambitions to becoming the world’s No. 1 exporter of the commodity, used in high-tech devices such as smart phones and electric cars. (8/19)

In Cuba, a study assessing the resource potential for several areas is progressing as planned and quickly becoming a key portfolio component, MEO Australia said. Work is already underway to lay the groundwork for a drilling program there. (8/16)

In Mexico, Pemex’s deteriorating finances are poised to get much worse, signaling no end in sight to years of declining oil production. The company’s output may dwindle to about 1.6 million barrels a day by 2020, less than half its 2004 peak, because it lacks the technology and funds to revamp aging fields. (8/19)

In Mexico, U.S. oil majors ExxonMobil, Chevron and Hess will bid jointly in the upcoming oil and gas tender on December 5. The tender, which is the first one focused on deepwater deposits, is expected to generate US$44 billion in proceeds. (8/20)

The US oil rig count rose by 10 to 406, marking the 8th straight week of growth, according to Baker Hughes Inc. Gas rigs were unchanged at 83. One year ago, oil rigs were 674 strong, while the gas count stood at 211. (8/20)

In the Gulf of Mexico, eight fields started production last year, and four more will start operations this year.  By next year, 20% of US crude oil is expected to come from the GOM. (8/19)

Louisiana’s shrinking coastline is causing headaches for the oil industry in that state, as an eroding coast and rising sea waters are threatening oil infrastructure. The coastline is disappearing at a rate of approximately 20 square miles per year, which could mean that more than 610 miles of pipeline could be exposed over a period of 25 years — $100 billion of energy infrastructure is threatened by rising sea levels and erosion. (8/19)

US crude oil exports averaged 501,000 b/d in the first five months of 2016, 43,000 b/d more than the full-year 2015 daily average, according to the latest EIA data. (8/17) [NOTE: that’s nearly the same level as the increase in U.S. crude oil and product imports during that same time frame.]

US gasoline demand rose 2.4 percent from a year earlier to 9.67 million b/d, the American Petroleum Institute said Thursday. Total fuel deliveries, a measure of consumption, climbed 0.8 percent to the highest July total since 2007. (8/19)

The strained oilfield services sector faces a debt wall of about $110 billion that will mature or expire during the next five years, according to a report from Moody’s Investors Service released Aug. 9. (8/18)

ExxonMobil Corp shut a crude distillation unit at its 502,500 b/d Baton Rouge refinery on Tuesday as flooding disrupted operations at a liquefied petroleum gas (LPG) storage facility. (8/18)

Continental Resources said it sold around 80,000 acres in western North Dakota and parts of Montana to an undisclosed buyer for $222 million. Combined with two other sales of similar nature earlier this year, the company said it’s taken in about $600 million. (8/19)

Squeezing costs: When the British oil giant announced Mad Dog’s second phase in 2011, it put the price at $20 billion. Last month, after simplifying plans and benefiting from a sharp drop in everything from steel to drilling services, Chief Executive Officer Bob Dudley said he could do the job for $9 billion. (8/18)

Fracking tech: The oil-and-gas well BP is drilling here in the Texas Panhandle looks ordinary enough from the surface. Yet a mile-and-a-half underground, horizontal pipes shoot off for at least a mile in three directions, like a chicken’s foot. The idea, part of an experiment by BP executive David Lawler, is to make three wells from one. It also is designed to help turn the London-based energy giant into a shale-oil innovator that can better compete with the entrepreneurial outfits that pioneered the business of hydraulic fracturing, or fracking. (8/17)

Sand men: Preoccupied with oil prices, production reports, and rig counts, most U.S. oil industry watchers miss one quiet segment of this industry that is actually thriving and will, in all likelihood, continue to thrive in the near future. This segment is sand mining. When oil companies talk about constantly improving the efficiency of their wells, one common theme is increasing the amount of sand they pour into them. More sand makes for more oil, at no great cost increase. (8/16)

Pipeline regs: The U.S. Department of Transportation’s Pipeline and Hazardous Materials Safety Administration issued a bulletin reminding operators how to change the status of a pipeline from “active” to “abandoned” as federal regulations do not recognize designations beyond that framework. (8/18)

A recent judge’s decision that overturned Obama administration rules on hydraulic fracturing on federal and Indian lands ignores more than a century of regulatory precedent, an attorney with Earthjustice appealing that decision said Monday. (8/16)

Fracking fracas: On Thursday, the EPA Science Advisory Board said the EPA had failed to provide sufficient documentation to back up its assertion that the agency had found no evidence that fracking had led to “widespread, systemic impacts on drinking water resources in the United States.” (8/16)

Arctic regs: In its new rules for oil and gas drilling in the Arctic, the US has taken the biggest step yet toward a performance-based system that sets clear standards, but allows industry flexibility in how to meet them. That’s a big difference from most US offshore regulation, which is prescriptive in nature. (8/15)

Energy jobs: In 2015, the manufacturing part of the solar and wind industries have over 100,000 people making pieces and parts in the United States. This is up 20 percent, or over 20,000 people, over the previous year. In fact, this number is expected to continue to grow at that pace for the next five years. (8/18)

Jobs: If coal is on the way out, and solar is on the way up, how difficult will it be to transition workers from one energy industry to the other? A new article in Energy Economics tackles this question, and the conclusions are positive. (8/20)

General Electric says its technology upgrades are improving efficiency and reducing emissions at newer coal-fired plants. GE leaders say they can reap decades of profits from existing coal power plants, installing upgrades that will come in response to slowly tightening emissions rules and utilities’ desire to boost output. (8/18)

Vietnam’s coal imports surged 141% year on year to 1.31 million mt in July, customs data released Monday showed. Traditionally a coal exporter, Vietnam turned into an importer amid rising domestic demand, particularly from the power sector. (8/17)

In China, deep in the coal heartlands of northern Shanxi province, people in Helin village are fighting a losing battle as the ground beneath them crumbles: patching up cracks, rebuilding walls and filling in sinkholes caused by decades of coal mining. (8/15)

A range of mini-nuclear power plants could help solve Britain’s looming power crunch, rather than the $24 billion Hinkley project snarled up in delays, companies developing the technology say. So-called small modular reactors use existing or new nuclear technology scaled down to a fraction of the size of larger plants would be able to produce around a tenth of the electricity created by large-scale projects, such as Hinkley. (8/19)

Nissan Motor Co has come up with a new type of gasoline engine it says may make some of today’s advanced diesel engines obsolete. The new engine uses variable compression technology, which Nissan engineers say allows it at any given moment to choose an optimal compression ratio for combustion – a key factor in the trade-off between power and efficiency in all gasoline-fuelled engines. (8/15)

Volvo Cars and ride-sharing company Uber have signed an agreement to establish a joint project that will develop new base vehicles that will be able to incorporate the latest developments in AD technologies, up to and including fully autonomous driverless cars. (8/19)

EVs: A study by a team at MIT has concluded that roughly 90 percent of the personal vehicles on the road in the US could be replaced by an electric vehicle available on the market today, even if the cars can only charge overnight. (8/16)

Efficient and cost-effective energy storage could allow intermittent power sources such as renewables to play a base load role in energy delivery. The US government is leading the way in research and development to find solutions, funding 75 projects developing electricity storage. There are plans for hydrogen bromide, zinc-air batteries, storage in molten glass, next-generation flywheels, to name but a few with many claiming “drastic improvements” that can slash storage costs by 80–90 percent. The potential for industry is huge; a Mckinsey estimate claims that the energy storage market will grow a hundredfold to $90 billion a year by 2025. (8/16)

Wave energy: As much as $40 million may be available to help support the development of a wave-energy testing facility in U.S waters. (8/18)

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