|Quote of the Week
“I’ve been coming to Singapore once a year for the last 15 years, and flying in I have never seen the waters so full of idle tankers,’ said a senior European oil trader a day after arriving in the city-state.”
Keith Wallis and Roslan Khasawneh, for Reuters
1. Oil and the Global Economy
2. The Middle East & North Africa
6. The Briefs
1. Oil and the Global Economy
Last week began on a bullish tone with oil prices climbing to a seven-month high, Goldman Sachs talking about the end of the oil glut, and columnists predicting a new spike in prices. All this optimism was based on solid Chinese oil imports, strong US gasoline demand, and production outages in Alberta, Nigeria, Libya and Venezuela. As the week moved on, however, the market became less optimistic as US, European, and Asian crude stocks continued to rise, and prices failed to break through the $50 a barrel barrier.
Some are looking for weaker oil markets in the immediate future as the Middle East continues to produce increasing amounts of oil, the Alberta tar sands recovers from the forest fire, and US production does not slip as fast as official predictions. In addition, the US dollar was stronger last week as many see a US interest rate increase in June bringing still more pressure on the oil markets. Libyan production has started to rebound and it seems increasing likely that there could be foreign military intervention in the country shortly to stem the refugee flow to the EU and suppress the growing power of the Islamic State. One benefit of such an intervention could be increased oil production which is still running a million b/d below its pre-uprising levels. Still, however, it appears that the exports from either Nigeria, Venezuela, or both could be seriously reduced or even halted in the next few months removing another 3-4 million b/d from the export markets.
A record amount of oil in onshore and offshore storage is helping to keep the lid on oil prices through temporary outages such as fires in Alberta and the political feuding in Libya. The futures market for crude oil storage space which was launched last year has been expanding of late as major oil depots across the globe, such as Cushing, the Louisiana Offshore Port, and Rotterdam are either full or approaching capacity. Some are still predicting that there could be a serious storage capacity shortage later this year that would lower prices and force a reduction in crude production.
The IEA says there still was a 1.47 million b/d surplus of crude production in the first quarter which is only down slightly from the average surplus of 1.54 million in 2015. When all this is put together, the conventional wisdom seems to be that there will be a surplus for the rest of the year as demand slows and the competition for market shares continues.
2. The Middle East & North Africa
Iran: Iran’s oil exports appear to be increasing faster than outside observers predicted would be the case. Tehran’s May exports are on track to reach 2.1 million b/d this month which is 60 percent higher than the 1.3 million barrels exported in May of 2015 when the country was under sanctions. Sales to the European markets are now around 400,000 b/d which is nearly half of what Tehran was exporting to Europe before the sanctions. The rapid increase in exports shows that Tehran has overcome the problem of finding tankers able and willing to take its oil.
The struggle between Iran’s ultra-conservative Revolutionary Guard and the more moderate government of President Rouhani continues in the wake of the sanctions agreement which is bringing an economic boom to the country. Over the years, the Guard has become deeply involved in owning or managing key sectors of the economy including natural gas, construction, transportation, financial services, and telecommunications. The Guard favors national security and social/religious conservatism above all and fears the new internationalism will bring more contact with Western culture along with investment and technology. The outcome of this struggle will shape the direction of Iranian policies in the years ahead.
In thinking about the future of Iran, it is well to remember that the country sits squarely in the middle of a climate change induced drought that will increasingly stress Iran’s food and water supplies in coming years. This problem could easily come to dominate all others in coming decades.
Syria/Iraq: Russia’s Lukoil, which is heavily involved in Iraqi oil production is saying that Baghdad’s oil production has probably peaked and is likely to fall short of production targets in the next two years. Low oil prices have forced the oil ministry to cut back on investment by about 50 percent in developing increased oil production. Lukoil spending on the West Qurna 2 oilfield which it is developing was about $3 billion last year but is likely to fall to $1.3 billion in 2016, jeopardizing plans to increase production from the field from the current 400,000 b/d to 1.2 million in the next decade.
When Baghdad first negotiated contracts with International Oil Companies (IOCs) a few years back, the Iraqis were concerned that the oil companies would make too much money developing Iraqi oil and would only offer fixed fee service contracts that paid the companies the same no matter what the price of oil. This worked fine for the Iraqis when oil was above $100 a barrel but with prices less than $50 Baghdad is not making enough to pay the fixed fees to develop their oil and are asking the IOCs to participate in the risk.
Oil production in southern Iraq from has been on a roll in recent years with steady increases in crude output as companies such as BP, Shell, and Lukoil drilled in large oil fields that had been neglected for decades. Exports are currently running about 3.3 million b/d from Basra in the south and about 500,000 b/d from Iraqi Kurdistan through Turkey.
Baghdad has reached a $5.4 billion funding agreement with the IMF which it hopes will carry it through the current period of low oil prices. This accord may give Baghdad access to an additional $10 billion in funding from other sources.
The political situation in Baghdad is still unsettled with efforts to form a new more technocratic and less corrupt government making little progress. ISIL, under increasing pressure from foreign air strikes and attacks by Iraq’s security forces, is retaliating with increased terror bombings of Shiite districts in Baghdad. Last week ISIL launched a successful attack on a natural gas plant north of Baghdad causing considerable damage.
Libya: Reporting is mixed on just what kind of military intervention in Libya NATO will carry out. With foreign boots on the ground an anathema these days, most are looking to see more military advisors, more military aid, efforts to build a viable Libyan national army, and air strikes on Islamic State units and facilities as the most likely forms of support in the immediate future.
The major political problem in Libya is that the eastern government and its military leader, General Haftar, are refusing to join the UN-backed Unity government in Tripoli until the numerous militias supporting it are disbanded. The Eastern government also wants Haftar to head the new national armed force, something which the new Tripoli government opposes.
There was progress on the oil exports issue last week with a new deal that allows shipments from the eastern oil terminal at al-Hariga. The National Oil Company expressed the hope that the deal would lead to the opening of the other oil ports including Ras Lanuf and Es Sider, Libya’s largest such facilities. After the deal had been announced, a tanker loaded with 660,000 barrels of oil left al Hariga. This was the first shipment from the port since early May. This agreement will allow Libya’s exports to increase from circa 100,000 b/d to 300,000.
Saudi Arabia: Most of last week’s news dealt with the precarious state of the Saudi economy brought about by low oil prices. New construction contracts in the Kingdom are down by 50 percent from last year and tens of thousands have lost their jobs, sometimes turning to violence in protest. With political power accumulating in the hands of the King’s 30-year-old son, Prince Mohammed, many in the royal family are disturbed at the course of events. Although the government is still firmly in control, the kingdom is still an autocratic medieval state that is completely dependent on oil revenues and generous subsidies to its populace to survive.
Cash is so short in Saudi Arabia these days that the government has resorted to paying contractors with IOUs and has borrowing against anticipated oil revenues as the IMF warns that Riyadh is running through its currency reserves. Moody’s has lowered its credit rating which noted that the country’s GDP sank by 13 percent last year and will shrink by another 5 percent in 2016.
The solution to all this is a new plan called “Vision 2030” which is to convert the kingdom into a financial and management center that will live on earnings of the assets it owns. Where the money to accumulate the $2 trillion to implement this plan is unknown. The country where most of the hard work is done by foreign labor and the Saudi citizens live on government jobs and now shrinking subsidies is in no position to become a major financial and management center in the next 15 years. The Saudis too will suffer from ever-increasing temperatures which will require increasing use of its oil resource just to survive and keep its populace quiescent.
While Beijing does not reveal the size of its strategic petroleum reserves, outsider calculations based on crude production, imports, and refinery runs show the Chinese have been taking advantage of low oil prices to increase their stockpiles. Data on crude supplies and refinery runs over the last four months show that 870,000 b/d did not get refined and remains in commercial or strategic stockpiles. This implies that some 105 million barrels have gone into storage this year at three times the rate that analysts had been expecting.
China is currently filling its recently completed second stage of its strategic reserve, which has a capacity of 244.8 million barrels. The third stage which is due for completion in 2020 will leave the country with a 90-day supply of crude. This reserve is becoming important as domestic production slips and imports from unstable sources increase. New data shows that China’s domestic production in April was down 5.6 percent from that in April 2015. In recent years, the Chinese have had trouble in maintaining oil supplies from Sudan, Venezuela, and West Africa despite large investments in these countries.
Demand for crude by China’s newly expanded refineries is still supporting global oil prices but is leading to overproduction of oil products which are being dumped on the export market. From a global point of view, this does little to cut overproduction of crude as Chinese exports just cut into sales of other Asian refiners.
Concerns are growing about the size of China’s governmental debts which have gone from 155 percent of GDP in 2008 to 260 percent last year. Much of this money went to finance expansion of the steel, cement, and housing industries which are now well over needed capacity. To right-size these industries will cost the government billions in subsidies to retrain and find jobs for the workers that will have to be laid off.
Beijing had been hoping to increase its use of natural gas to 10 percent of its energy mix by 2020 from 6 percent last year. So far this plan is not going well as natural gas in China costs three times as much as coal, suggesting that Beijing may have a tough time cleaning up its air in the near future.
On Friday, the Supreme Court, as expected, upheld President Maduro’s state-of-emergency decree which gives him nearly unlimited powers without reference to the parliament. The capitol is now filled with security forces ready to quell any riots that erupt. Ironically, demonstrations have been smaller than expected as most people are too busy searching for food and water to join the protests. Efforts to impeach the President are underway, but due to the intricacies of the Venezuela’s constitution it is doubtful they will succeed.
The country continues toward total societal collapse with no medical services, little food, and a murder rate that is off the scale. The government will no longer release information on the status of the Guri dam which produces two-thirds of the country’s power. Planned blackouts to save power have been in effect for several weeks, but the government has stopped talking about their duration or frequency.
There is no clear way out of this situation. Even if the government should be driven from power by a military coup, restoring the economy will take years. In the meantime, the hardships faced by the Venezuelans will approach those in the Middle East.
Even though much of energy for Venezuela’s oil production comes from natural gas, it is difficult to see much production continuing in the event of a total societal collapse and mass starvation.
Insurgent attacks on oil facilities come almost every day now as the Niger Delta Avengers continue their drive to halt Nigerian oil production. Government policy prevents the oil companies from discussing the efficacy of insurgent attacks so that little is reported after an attack other than there has been a “stoppage.”
The IEA says that Nigeria’s oil production declined to 1.6 million b/d in April and is probably lower today. Deep-water production, which was about 800,000 b/d accounting for about 35 percent of Nigeria’s oil production before the current round of attacks began, has not been affected thus far. At least one shallow water facility has been put out of operation by the insurgents. Although attacks on oil platforms far at sea are more difficult to mount, one large drill-ship was commandeered temporarily by insurgents six or seven years ago.
The gasoline shortage in Nigeria’s major cities continues. Nearly all the country’s gasoline must be imported now. Mismanagement of the import process accounts for the shortages.
6. The Briefs
Northern European gas: Despite regional reservations, Russia’s Gazprom said expanding a Baltic Sea gas pipeline would add another layer of reliability for European energy markets. Gazprom said it gathered the relevant parties in Moscow to review developments of the planned second phase of the twin Nord Stream natural gas pipeline running through the Baltic Sea to Germany. (5/19)
Southern European gas: After years of debate, political jockeying, and acrimony, a major pipeline project to bring natural gas to Southern Europe has broken ground. The Trans-Adriatic Pipeline (TAP) will connect the Caspian Sea to European markets, providing Europe with another large source of natural gas that will help the continent diversify away from Russia. (5/19)
The Norwegian Petroleum Directorate published preliminary production figures for April, showing oil production averaged 1.63 million b/d, about 3 percent higher than the agency had expected. The oil production was about 4 percent above the oil production in April last year. (5/21)
Norway awarded licenses to 13 oil companies as it expands into an entirely new part of the Arctic Barents Sea in an area previously disputed with Russia in a bid to stimulate exploration at a time of low crude prices. Statoil, Lundin Petroleum, and Det Norske Oljeselskap were among companies that were awarded licenses. Proponents say the licenses are for the most promising area since discoveries during the 1990s. (5/19)
Turkey’s downing of a Russian jet along the Syrian border on November 24, 2015, has forced Ankara to adjust its foreign policy and address its energy security issues. The crisis between Turkey and Russia firmly highlighted the dependence of Turkey on Russian energy resources. To reduce that dependence, Ankara began to seek alternative energy suppliers and new routes. Turkey turned to Israel, hoping to once again normalize relations between the two states. Erdogan now aims to build an East Mediterranean natural gas pipeline, which could transport natural gas supplies from Israel to Cyprus. (5/18)
In Turkey, Norwegian energy company Statoil said Monday it signed an agreement with a Canadian exploration company to help explore the shale gas potential in the country. Statoil agrees to help finance the exploration in an area that Valeuera said has a “significant upside potential” using hydraulic fracturing technology. (5/17)
Kuwait’s state-run oil company is planning $42 billion in investments by 2022, as the country pursues a three-fold strategy to increase oil production, expand its refineries and flesh out a clean fuels project. (5/20)
Kuwait, the Middle East’s second-richest nation, is responding to the oil price shock crisis by “spending as much as possible” to bolster economic growth. Anas Al-Saleh, Kuwait’s deputy premier, said that the government isn’t canceling any projects. At the same time, authorities are cutting wasteful spending to plug a budget deficit that could exceed 13 percent of gross domestic product in 2016. (5/19)
India’s oil consumption has grown at an average annual rate of 5 percent over the last decade and climbed to over 4 million barrels per day for the first time in the year ending in March 2016. India is currently the world’s fourth-largest oil consumer after the United States, China, and Japan, and set to overtake Japan for the third slot within the next 12-18 months. (5/17)
India sustained crude oil imports at a record level during April and purchased more diesel than it has in the previous three years combined. The South Asian nation imported 4.39 million barrels a day last month. (5/19)
In the Falkland Islands, oil and gas producer Rockhopper Exploration has announced that its net contingent oil reserves have doubled to more than 300 million barrels, and independent experts are now eyeing this as a nearly billion-barrel basin. (5/21)
Colombia’s second-largest oil pipeline has been taken offline by a rebel attack which spilled crude oil into the Bojaba river. This is the fourteenth such attack this year. The Cano-Limon Covenas pipeline has a 210,000 barrel per day capacity. (5/20)
Venezuela can’t pay its over-100-million-dollar debt to Indian pharmaceutical companies, say Indian officials, so officials are considering a proposal that would see the Latin American company swap oil for its drug debts. (5/20)
Pemex is in talks with Exxon Mobil, Total, and Chevron as Mexico’s struggling state-run oil producer seeks partners to develop deepwater crude in the Gulf of Mexico. Pemex may also start discussions with Oslo-based Statoil. (5/20)
In Canada, the highest oil price in six months is offering hope to the beleaguered energy industry, but it may be coming too late for some of the country’s most indebted companies. On Monday, Penn West Petroleum warned it may not survive if it can’t negotiate new borrowing limits by the end of the second quarter, and Connacher Oil and Gas said it was seeking creditor protection under the Companies’ Creditors Arrangement Act. (5/18)
The U.S. oil-rig count was unchanged at 318 in the latest reporting week, Baker Hughes said. The number of U.S. gas rigs fell by two to 85. (5/21)
The Marcellus Shale continues to be the largest source of natural gas in the US by a wide margin, with daily amounts that put it on par with leading international producers such as Iran and Qatar. This is despite a serious dip in production that began last year as the market became saturated and prices plunged. (5/20)
In Pennsylvania, Grant Township passed a law that protects its residents from arrest if they protest Pennsylvania General Energy Company’s creation of an injection well. Township Supervisor Stacy Long said legalizing direct action is a response to the ongoing problem of rural residents seeing their voices excluded from discussions between state governments and big corporations on issues that have local ramifications. It is likely the first such law in the country. (5/19)
Thousands of protesters from across the Northeast came to Albany, New York on Saturday to block a “bomb train” transporting fracked oil and exposing communities along its path to major risks of derailment, oil spillage and explosion. The protest in Albany was just one of many targeting the fossil fuel industry to take place that week. Others were held in the United Kingdom, the Philippines, Australia, South Africa, Nigeria, Pennsylvania, Washington and Colorado. (5/18)
US natural gas-fired power generation increased 19 percent in 2015, because of low natural gas prices, increased gas-fired generation capacity, and coal power plant retirements. The EIA May forecasts that this year, natural gas-fired generation will exceed coal generation in the US on an annual basis. (5/20)
Technip and FMC, two major oil services companies, have agreed to a $13 billion merger as they consolidate and cut costs to cope with the effects of prolonged low oil prices. Technip, which is based in France, and FMC, a` US-based company, said they will create a new company called TechnipFMC. (5/19)
Continental Resources said it completed an “industry record well” in the STACK shale reserve basin within the Anadarko basin in Oklahoma. Over a 24-hour test, the Verona well flowed 2,345 barrels of oil, which represented about 70 percent of the well’s total production; the rest was associated gas. (5/19)
In Oklahoma, after intense lobbying, oilmen scored a victory two years ago. State lawmakers voted to keep in place some of lowest taxes on oil and gas production in the US – a break worth $470 million in fiscal year 2015 alone. The state’s schools haven’t been so fortunate, as budget cuts are forcing layoffs, 4-day school weeks, and the like. (5/18)
Bankruptcy: Halcon Resources Corp announced yesterday that it is filing for Chapter 11 bankruptcy protection as part of a restructuring agreement with creditors—a move that could wipe out $1.8 billion, or 65 percent, of its debt and $222 million of preferred stock equity. (5/20)
In North Dakota, as the number of failed operators mounts, the surviving companies are laying the groundwork for what they forecast will be an era of slower but steadier growth in the state at the epicenter of the US’s energy boom. (5/18)
Rep. Kevin Cramer (R-ND), who has been advising Donald Trump on energy policy, is leading a plan to investigate OPEC for unfair trade practices. Cramer said the US needed to examine whether the cartel was acting anti-competitively to strengthen its hold over the market, because of the importance of energy to national security. (5/19)
US retail gasoline prices have been relatively stable (up 1% in a week) against a 15% increase in oil prices, but are likely set for a rally in the coming days, analysis finds. (5/18)
Peabody Energy won final bankruptcy-court approval for an $800 million financing package after lenders made concessions to appease creditors. Peabody said final approval on the chapter 11 financial arrangements ensures the coal company can continue operating as usual while it works through a load of debt that it can’t support given the declines in coal demand and prices. (5/18)
Some 15 to 20 nuclear power units in the US are “at risk” of being shut over the next five to 10 years due to economic challenges such as low power prices, competition from natural gas-fired generation and subsidized renewables, said Marvin Fertel, president and CEO of the Nuclear Energy Institute. (5/20)
As Hawaii pushes to meet its aggressive renewable energy goals, two companies have proposed offshore wind turbine projects for federal waters off Oahu. Their plan would use technology that floats the massive turbines in deep waters miles offshore. The offshore turbine proposals are in the early stages, and would face years of environmental reviews and community meetings before possible approval. (5/17)
The cost of installing solar energy in the United States is down more than 50 percent since the start of a federal support program, the Energy Department said. The program aims to move solar power capacity from less than 1 percent of the national electricity supply to 14 percent by 2020. (5/20)
India suffered an extreme heat wave last week, with the temperature hitting 123.8 degrees F.— the country’s hottest day ever. The heat is amplified by an accompanying drought across much of the country. Farmers continue to struggle with the effects of inadequate rainfall from the last monsoon: negligible crop yields, scarce drinking water, and emaciated cattle. (5/21)
DUCs update: US shale operators have accumulated an estimated 3,900 drilled but uncompleted (DUC) horizontal oil wells with more than 90 percent located in major plays, said Rystad Energy’s latest analysis. The company estimates the Permian Basin has 1,200 wells awaiting completion services, Eagle Ford 1,000, the Bakken formation 850, the Niobrara 620, and another 270 DUCs are spread across other plays.