Quote of the Week
“Climate change is a fact of life, as is not contested by Defendants. But the serious problems caused thereby are not for the judiciary to ameliorate. Global warming and solutions thereto must be addressed by the two other branches of government.”
US District Judge John Keenan in Manhattan, in dismissing a lawsuit by New York City against major oil companies
Graphics of the Week
1. Oil and the Global Economy
2. The Middle East & North Africa
7. The Briefs
1. Oil and the Global Economy
The $3 drop in US oil prices last Monday was a signal that the forces moving the oil market are changing. Last year, the main forces pushing the oil markets higher were the agreement by OPEC and its partners to lower production and the growth of global demand. This year, an array of factors are pressuring the oil markets: the US sanctions that threaten to cut Iranian oil exports; US-China trade tensions; OPEC’s decision to raise crude output; and dwindling oil production from Venezuela. Moreover, there are supply disruptions in Libya, the Canadian tar sands, Norway, and Nigeria that add to the uncertainties as does erratic policymaking in Washington, complete with threats to sell off part of the US strategic reserve and a weaker dollar.
After the sharp drop last Monday, prices climbed about a dollar a barrel to close at $68.26 in New York and $73.07 in London. Goldman Sachs continues to expect that Brent Crude prices could retest $80 a barrel this year, but probably only late in 2018. “Production disruptions and large supply shifts driven by US political decisions are the drivers of this new volatility, with demand remaining robust so far.” Brent Crude is expected to trade in the $70-$80 a barrel range in the immediate future.
The OPEC Production Cut: Saudi Arabia plans to reduce crude exports next month by 100,000 b/d in August according to a Reuters report. Saudi Arabia—and Russia—had started to raise production even before the June 22 meeting with OPEC that sought to address the shrinking global oil supply and rising prices. Earlier this year, OPEC was over-complying with the cuts agreed to at the November 2016 meeting thanks to additional cuts from Saudi Arabia and Venezuela. The June 22nd meeting decided to increase production to more closely reflect the production cut agreement. After the meeting, Saudi Arabia pledged a “measurable” supply boost but gave no specific numbers. According to Iran’s news agency, Tehran’s oil minister warned his Saudi Arabian counterpart that the June 22nd revisions to the OPEC supply pact do not give member countries the right to raise oil production above their targets.
The Saudis, Russia, and several of the Gulf Arab states increased production in June, but seem reluctant to expand much further. During the summer months, the Saudis need to burn raw crude in their power stations to combat temperatures that will be on the order of 110o to 115o Fahrenheit during the next few weeks.
Wood Mackenzie’s latest long-term outlook for the worldwide oil supply says that OPEC and its partners will continue to play a crucial role in oil supply and prices in the global oil market through 2040, despite expectations for production increases in the US and other non-OPEC countries in the 2020s.
US Shale Oil Production: According to the EIA’s latest Drilling Productivity Report, US unconventional oil production is projected to rise by 143,000 b/d in August to 7.470 million b/d. The Permian Basin is seen as far outdistancing other shale basins in monthly growth in August, at 73,000 b/d to 3.406 million b/d. However, drilled but uncompleted (DUC) wells in the Permian rose 164 in June to 3,368, one of the largest builds in recent months. Total US DUCs rose by 193 to 7,943 in June. US energy companies last week cut oil rigs by the most in a week since March as the rate of growth has slowed over the past month or so with recent declines in crude prices.
Included with the optimistic forecast for US shale oil was the caveat that the DUC and production figures are sketchy as current information is difficult for the EIA to obtain with little specific data being provided to Washington by E&Ps or midstream operators. Given all the publicity surrounding constraints on moving oil from the Permian to market, the EIA admits that it “may overestimate production due to constraints” in oil and gas takeaway capacity and that they “have watched [well completions] filings coming in and they are disappointing” over the last few weeks.
The increasing DUC count in the Permian is an important concern. If oil and gas cannot find a way out of the basin, a growing number of wells will need to be banked for the next year or so and left uncompleted until new pipeline capacity comes online in Q3 2019. The number of DUCs has increased steadily in the last six months, with each month adding over 110 DUCs to inventory, month-on-month. Completion crews are scarce in the Permian and haven’t been able to keep up now for the last two years. Labor shortages also have helped contribute to delays in setting up facilities on site – that is, processing, pipelines, storage tanks — so some producers must wait to bring some wells online.
An EIA analyst noted that it is fair to say that the scarcity of fracking crews and labor shortages, and impending pipeline constraints will be the primary contributor to the rise in DUC counts and a plateau of rig growth. However, he would not say that the 164 DUC increase seen last month is strictly because of the pipeline constraints.” “Rather, I see it as just the continuation of an 18-month trend.”
Production in the Eagle Ford Shale of South Texas is forecasted to grow 35,000 b/d in August to 1.436 million b/d, while the Bakken Shale of North Dakota and Montana is forecast by the EIA to grow 15,000 b/d to 1.297 million b/d. The Anadarko Basin of Oklahoma and the Texas Panhandle is predicted to grow 10,000 b/d to 559,000 b/d, while the Niobrara Shale in Colorado and Wyoming is pegged to increase by 6,000 b/d to 611,000 b/d. The Appalachian Basin in Pennsylvania, Ohio and West Virginia is forecast at 4,000 b/d of oil growth in August to 118,000 b/d. The Haynesville Shale, in northeast Louisiana and east Texas, is expected to remain flat in oil output in August at 43,000 b/d.
2. The Middle East & North Africa
Iran: Last week Iran’s supreme leader, Ayatollah Ali Khamenei, called on state bodies to support the government of President Hassan Rouhani in fighting US economic sanctions. The likely return of US economic sanctions has triggered a rapid fall of Iran’s currency and protests by bazaar traders usually loyal to the Islamist rulers, and a public outcry over alleged price gouging and profiteering. Khamenei said “the government’s economic team is the axis of all activity in the country, calling all the bodies to coordinate with it,” the website reported.“ He advised state radio and TV to reflect a correct image of government activities.”
This speech to members of Rouhani’s cabinet is clearly aimed at the conservative elements in the government who have been critical of the President and his policies of cooperation with the West and a call for unity in a time that seems likely to be one of great economic difficulty for Iran. In late December, demonstrations which began over economic hardship spread to more than 80 Iranian cities and towns. At least 25 people died in the unrest, the most significant expression of public discontent in almost a decade. Demonstrators initially vented their anger over high prices and alleged corruption, but the protests took on a rare political dimension, with a growing number of people calling on Supreme Leader Khamenei to step down.
The US has rebuffed high-level pleas from the European Union to grant exemptions to European companies from its sanctions against Iran. Secretary of State Pompeo said the US rejected the appeal because it wants to exert maximum pressure on Iran. He said exemptions would only be made if they benefited US national security. The EU fears that billions of dollars’ worth of trade could be jeopardized as a result of Washington’s new sanctions.
Although there is much debate over the effectiveness of the impending US sanctions, some analysts are saying that Iran’s oil exports could fall by as much as two-thirds by the end of the year putting oil markets under massive strain amid supply outages elsewhere in the world. Some of the worst-case scenarios are forecasting a drop to only 700,000 b/d with most of Tehran’s exports going to China, and smaller shares going to India, Turkey and other buyers with waivers. China, the biggest importer of Iranian oil at 650,000 b/d according to Reuters trade flow data, is likely to ignore US sanctions.
However, some in Washington now expect that China will import much of the Iranian oil that other nations won’t buy, according to a senior US government energy official. Beijing’s purchase of extra Iranian crude would dull the economic impact of Washington’s sanctions.
Iraq: Iraq’s future is again in trouble as protests erupt across the country. These protests began two weeks ago in southern Iraq after the government was accused of doing nothing to alleviate a deepening unemployment crisis, water and electricity shortages and rampant corruption. The demonstrations are spreading to major population centers including Najaf and Amirah, and now discontent is stirring in Baghdad.
The government has been quick to promise more funding and investment in the development of chronically underdeveloped cities, but this has done little to quell public anger. Iraqis have heard these promises countless times before, and with a water and energy crisis striking in the middle of scorching summer heat, people are less inclined to believe what their government says.
Over the weekend the civil unrest has begun to diminish in southern Iraq, leaving the country’s oil sector shaken but secure – though protesters have vowed to return. Operations at several oil fields have been affected, as international oil companies and service companies have temporarily withdrawn staff from some areas that saw protests. The government claims that the production and exporting of oil has remained steady during the protests.
With Iran refusing to provide for Iraq’s electricity needs, Baghdad has now also turned to Saudi Arabia to see if its southern Arab neighbor can help alleviate the crises it faces.
Saudi Arabia: Saudi Aramco’s potential acquisition of a stake in petrochemicals company Sabic will affect the timing of an initial public offering, its chief executive said, throwing further doubt on the kingdom’s plans to sell shares in its state giant. The IPO has been touted for the past two years as the centerpiece of an ambitious economic reform program driven by crown prince Mohammed bin Salman to diversify the Saudi economy beyond oil.
Saudi Arabia expects its crude exports to drop by roughly 100,000 b/d in August as the kingdom tries to ensure it does not push oil into the market beyond its customers’ needs, the Saudi’s OPEC governor said on Thursday. An industry source familiar with the matter said Saudi oil exports in June were about 7.2 million b/d, while the latest official figures show May exports at 6.984 million b/d.
The Iran-backed Houthi rebels in Yemen say that they targeted Saudi Aramco’s refinery in the capital of Riyadh with a long-range drone on Wednesday. The Houthis are saying that the “new long-range Drone, Sammad 2, that targeted Aramco in Riyadh is a successful and qualitative experience.” Saudi Aramco said later on Wednesday that “fire protection crews and Civil Defense successfully controlled a minor fire due to an operational incident at the Riyadh Refinery today. No personnel were injured and there was no impact on operations.”
Libya: Just a few days after Libya reopened its eastern oil ports and started to ramp up production that had been offline for weeks, the National Oil Corporation (NOC) declared force majeure on crude oil loadings at the Zawiya port in the west, following an attack and abduction of oil workers at the Sharara oil field. Production at Sharara was expected to drop by 160,000 b/d after oil workers were abducted and oil wells closed as a precaution.
Libya, however, is ramping up oil output at its eastern fields, offsetting the 160,000 b/d lost from the partial shutdown of the country’s biggest deposit after gunmen kidnapped workers there. Overall production rose from 650,000 to 700,000 b/d last week and is expected to rise further after shipments resume at eastern ports that re-opened after a political standoff.
China’s economy expanded by 6.7 percent in the second quarter, its slowest pace since 2016. The pace of annual expansion announced is still above the government’s target of “about 6.5 percent” growth for the year, but the slowdown comes as Beijing’s trade war with the US adds to headwinds from slowing domestic demand. The gross domestic product had grown at 6.8 percent in the previous three quarters.
The pace of growth in China’s crude imports may slow in the second half as lower runs at independent refiners, potential delays in the startup of some refineries and higher inventories curb demand. The first signs of weaker demand appeared in the June data, which showed imports falling 4.9 percent to a six-month low of 8.39 million b/d, marking the first year-on-year drop in 2018.
Higher oil prices play a role in the slowing of demand, but the main factor is higher taxes on independent Chinese refiners, which is already cutting into the refining margins and profits of the ‘teapots’ who have grown over the past three years to account for around a fifth of China’s total crude imports. Under the stricter tax regulations and reporting mechanisms effective March 1, however, the teapots now can’t avoid paying a consumption tax on refined oil product sales—as they did in the past three years—and their refining operations are becoming less profitable.
According to Reuters, Russia used stocks held at its oilfields to help boost crude production in June, as Saudi Arabia pushed other major producers to increase output. Russian oil production last month rose by around 100,000 b/d from May. From July 1-15, the country’s average oil output was 11.215 million b/d, an increase of 245,000 b/d from May’s production.
Amid growing speculation that President Trump will attempt to weaken US sanctions on Russia’s oil sector, US congressional leaders are pushing legislation to strengthen sanctions on Russian export pipelines and joint ventures with Russian oil and natural gas companies. These efforts, still in their early stages in the House and Senate, could increase investment risk in Russia’s oil and gas sector and, potentially, hinder some export growth, analysts said this week. However, according to congressional sources, the US oil and gas industry already is lobbying against tighter sanctions on Russia that could impact US investments there.
Ukraine and Russia said they would hold further European Union-mediated talks on supplying Europe with Russian gas, in a key first step toward renewing Ukraine’s gas transit contract that expires at the end of next year.
Gazprom is planning to develop more of the huge natural gas resources on Yamal peninsula as it would expand its northern gas transmission corridor. With more natural gas from the Arctic feeding the northern export route to European markets Gazprom would be in a better position to feed the Nord Stream pipeline and the planned Nord Stream 2 project. Last week, Gazprom approved the development of the Kharasaveyskoye gas and condensate field and the gas transmission system, expected to begin in 2019 and to ship first gas in 2023. The company is betting that Yamal will become the largest natural gas production center in Russia and replace the dwindling reserves of the Nadym-Pur-Taz region.
Constant pipeline breakages in the Niger Delta oil fields have increased oil and gas companies’ average shut down days from 45 to 160 days according to a former Director at the Department of Petroleum Resources, Osten Olorunsola. “There are operations around the world where you can almost guarantee 330 days for production. You can’t do all through the year because you have scheduled maintenance, but usually, it is not more than 30 to 45 days. “In terms of real operational shutdowns, we are seeing something between 80 and 160 days in Nigeria.”
Shell has again started talks for the $2-billion sale of two Nigerian oil licenses and their infrastructure assets, according to Bloomberg, after four years of failed attempts to offload the contentious assets. This latest round of talks are taking place with a Nigerian entity that has not secured financing for the deal, and like similar talks before this, they may collapse. Shell has been trying to refocus its Nigerian operations offshore to avoid unending local opposition to its activities, on-again-off-again militant attacks on its assets, and a quagmire surrounding accusations that it destroyed the Niger Delta with spills and failed to clean up after itself. Offshore, everything is less risky. But these remaining two onshore licenses have proven difficult to unload.
Venezuela’s Oil Minister Manuel Quevedo has been talking about plans to raise the country’s crude oil production in the second half of the year. However, no one else thinks or claims that Venezuela could soon reverse its steep production decline which has seen it losing more than 40,000 b/d of oil production every month for several months now. According to OPEC’s secondary sources in the latest Monthly Oil Market Report, Venezuela’s crude oil production dropped in June by 47,500 b/d from May, to average 1.340 million b/d in June.
In the midst of a collapsing regime, widespread hunger, and medical shortages, President Nicolas Maduro continues to grant generous oil subsidies to Cuba. After the fall of the Soviet Union, Cuba turned to Venezuela for subsidized crude oil, in exchange for sending skilled laborers and medical personnel to work in Venezuela. Havana also provided the Chavez government with intelligence and security personnel which helped the government control dissidence, which may be a factor in Maduro’s reluctance to cut ties with Havana.
Last year Venezuela cut off exports to Cuba for eight months, but then began sending shipments of light oil to Cuba in March 2017 at a great cost to their own refineries, which are running at just a small fraction of their capacity thanks to lack of funds for maintenance. Last week, there was a reported shipment of 500,000 barrels of Venezuelan crude to northwestern Cuba. It is believed that Venezuela continues to supply Cuba with around 55,000 barrels of oil per day, costing the nation around $1.2 billion per year.
7. The Briefs (date of the article in Peak Oil News is in parentheses)
Energy investment slowdown: The IEA in its world energy investment report found total global energy investments declined 2 percent from 2016 to reach $1.8 trillion last year. Of that, most went toward the electricity sector and oil and gas supply. The IEA said there were signs of a continued slowdown. Financial support for renewable energy, which accounted for about 60 percent of the total spending for power generation, declined 7 percent last year. (7/18)
Flaring down: World Bank data show the total volume of natural gas flared last year was down about 5 percent from the previous year. For Russia, the largest gas-flaring country in the world and among the world leaders in oil production, the volume of associated gas burned off declined 11 percent from 2016. From the US, on pace to pass Russia as an oil producer, flaring increased nearly 7 percent, putting it at No. 3 behind Iran and Libya, respectively, for major producers bucking the trend. (7/18)
Ireland is planning to move 200,000 tons of its oil reserves from Britain as part of its Brexit preparations and will sign off on the move this week. (7/16)
Italy’s imports of US crude oil vaulted to a record in June after attacks by armed groups shuttered two major Libyan oil ports and cut off most deliveries from the OPEC country, a key supplier to Europe, according to Thomson Reuters trade flow data and shipping intelligence firm Kpler. The flows reflected the US oil industry’s growing ability to serve as an alternative supplier when contained regional conflicts pinch oil supplies to allies. (7/21)
New Russian LNG: Russian energy company Novatek said Thursday it shipped its first batch of liquefied natural gas to China using the Northern Sea Route. The northern passageway is a shipping lane in Russia’s economic zone that runs along the Arctic coast to the Bering Strait. (7/20)
In the UAE, the Abu Dhabi National Oil Co. awarded a subsidiary of China National Petroleum Co. with a $1.6 billion contract to conduct seismic surveys covering about 20,000 square miles onshore and offshore. ADNOC said that makes it the largest survey of its kind in the world. (7/21)
The US oil rig count decreased by 5 in the week to July 20, bringing the total count down to 858, Baker Hughes energy services firm said. The number of gas rigs dipped by 2, hitting 187. Canada gained 14 oil and gas rigs for the week, 11 of which were gas rigs. Canada’s oil and gas rig count is now up just 5 year over year. Oil rigs are up by 24 year over year in Canada, while the number of gas rigs are down by 19. (7/21)
US crude oil production last week hit 11 million b/d for the first time in the nation’s history, the Energy Department said on Wednesday, as the ongoing boom in shale production continues to drive output. Note: weekly production figures from the US EIA are notorious for revisions, as monthly data, released on a lag, shows US production at 10.5 million b/d as of April. Even as production ramps up, the US, the world’s top oil consumer, still depends on imports. Net US crude imports rose last week by 2.2 million b/d to about 9 million bpd. (7/20)
Fracking sand rush: While most are busy watching all land grabs by oil and gas producers in the Permian, much less attention has been paid to the secondary land rush for the sandy wasteland that could ease some of the bottlenecks for producers who need fracking sand to make anything happen. (7/19)
New oil futures tool: Intercontinental Exchange Inc. (ICE) announced plans to launch an oil futures contract with physical delivery in Houston. The contract could launch as soon as this quarter. The Permian futures contract will provide price discovery, settlement and delivery at Magellan Midstream Partners, L.P.’s terminal in East Houston, ICE said. (7/19)
New VLCC terminal: To capitalize on the growing US exports to Asia and Europe, Houston-based Enterprise Products Partners plans to develop an offshore crude oil export terminal 80 miles off the Texas Gulf Coast. It would be able to fully load the biggest oil tankers in the world capable of carrying 2 million barrels of oil. Currently, the Louisiana Offshore Oil Port is the only oil port in the US capable of fully loading the so-called Very Large Crude Carriers (VLCC). (7/19)
Crude on rails: A shortage of pipeline takeaway capacity from the Permian Basin in West Texas is creating opportunities for Union Pacific to move crude oil in tank cars. (7/20)
Chevron’s new CEO Michael Wirth has said the company plans to maintain a tight grip on capital spending, despite the surge in oil prices over the past year and warnings that they could rise even higher over the next few years. (7/18)
Tariff relief denied: The Permian basin has run up against a bottleneck for pipeline capacity. One of the crucial pipeline projects slated to relieve the bottleneck in Permian pipeline capacity next year is the Plains All American Pipeline LP’s Cactus II 585,000 b/d project. Plains All American asked the Trump administration for an exemption from the 25 percent tariffs on imported steel. An industry estimate finds that about three-quarters of all the steel used in oil and gas pipelines comes from abroad, often because projects use a special type of steel that is hard to find domestically. The Trump administration just shot down the request from Plains All American, the first rejection for a major oil and gas project. (7/20)
In Texas, homes and businesses used record amounts of power last Wednesday and are expected to use even more in the coming days as consumers crank up their air conditioners to escape a brutal heat wave. The Electric Reliability Council of Texas (ERCOT) said demand reached 72,192 megawatts on Wednesday, topping the prior all-time high of 71,110 in August 2016. (7/20)
Nuke/coal study: Providing financial support to uneconomic US coal and nuclear power plants, as the Trump administration has ordered, could cost $16.7 billion annually, according to a study commissioned by a group of renewable energy, oil and gas trade associations and released Thursday. (7/20)
Wind winning cost war: Apart from diehard environmentalists, most consumers have been opposed to renewables on the basis they cost significantly more, and turbines are an eyesore on the landscape. Opposition has softened as we have become more familiar with the realization that its costs are falling dramatically. A recent article in The Telegraph reports on how the cost of power production from onshore wind farms has dropped so far it undercuts conventional coal, natural gas and nuclear options. (7/19)
Solar industry decline: Goldman Sachs is predicting that global solar installations will decline by 24 percent this year. And Goldman isn’t alone, even if it is throwing around the worst numbers. (7/21)
Norway’s hydro: An unusually hot, dry second quarter saw Statkraft’s hydro-based power production fall 22 percent to 11.5 TWh for the period, the state utility said Thursday. The decline mirrors a north European trend this summer with little rainfall and settled high pressure weather conditions bearing down on hydro and wind production. (7/19)
Tariffs to hit cars: Consumers should expect higher prices on imported cars if President Donald Trump’s proposed 25 percent tariff on foreign-built vehicles shipped into the US is enacted, according to car sellers. Car makers said they plan to pass on the added costs to customers, which dealers and car sellers said could lead to a decline in sales. About 44% of all U.S.-sold cars were imported into the country last year. (7/18)
Euro EVs: Sales of electric vehicles and plug-in hybrids in Europe’s top car markets rose by just 33 percent in the first half this year, compared to a 54-percent surge in the same period last year, as customers are still wary of limited driving ranges of the models and an insufficient charging network. (7/19)
Climate suit dismissed: a US judge on Thursday dismissed a lawsuit by New York City seeking to hold major oil companies liable for climate change caused by carbon emissions from burning fossil fuels. In dismissing the city’s claims, US District Judge John Keenan in Manhattan said climate change must be addressed through federal regulation and foreign policy. The City plans to appeal the position. (7/20)
CO2 and US policy: The signs don’t look favorable for carbon dioxide emissions controls under the Trump administration, which along with much of the Republican party, do not believe in climate change. However, the new acting head of the EPA, Andrew Wheeler, has conceded that the 2009 court decision that requires the EPA to regulate carbon dioxide emissions is “settled law.” How aggressively the agency interprets and ultimately enforces its mandate bears watching. (7/20)
Carbon capture: A British task force said Thursday that carbon capture and storage (CCUS) is ready for deployment, provided investments materialize by the early 2020s. Their report states that CCUS can already be deployed at a competitive cost, through the development of CCUS clusters in key UK regions. (7/20)
Big Dairy emissions? A new report by two agricultural players found that the five largest meat and dairy corporations combined—JBS, Tyson, Cargill, Dairy Farmers of America, and Fonterra—are already responsible for more annual greenhouse gas emissions than ExxonMobil, Shell, or BP. (7/19)
Biogenic solar cells: Researchers at the University of British Columbia have found that a genetically modified E. coli could soak sunlight just as well under an overcast sky as under a sunny one. This means bionic solar cells could be used in places where the weather conditions are not suitable for synthetic PV panels. (7/16)