Quotes of the Week

“Mark Papa, the former CEO of EOG Resources, and who has probably been presented more technical data pertaining to shale oil than anyone, believes that shale oil growth potential may be over-stated as the prime areas of the Eagle Ford and Bakken are already drilled up. The question is how far does the Permian have left.  Probably a couple of years.

Randy Evanchuk, P. Eng., retired from oil operations in 2015

“Now that I have retired, I have begun to look at the whole [nuclear] fusion enterprise more dispassionately, and I feel that a working, every-day, commercial fusion reactor would cause more problems than it would solve.”

Daniel Jassby, a research physicist who worked on nuclear fusion experiments for 25 years at the Princeton Plasma Physics Lab in New Jersey (3/19)

Graphic of the Week

Contents

1.  Oil and the Global Economy
2.  The Middle East & North Africa
3.  China
4.  Russia
5.  Venezuela
6.  The Briefs

1.  Oil and the Global Economy

The most significant news driving the oil markets last week came from Washington, where major policy and personnel shifts drove the markets down and up last week. Crude posted its biggest weekly gain since July on Friday as President Trump changed his national security team, fueling speculation sanctions on Iran will be re-imposed. Earlier in the week, the President’s imposition of new tariffs on imports had observers talking about a tariff war that could cut the demand for oil as economies slipped. Indications from the Saudis and Russians that the OPEC production freeze could be extended into 2019 helped lift prices earlier in the week.

London oil futures closed the week at $70.45 with New York futures nearly $5 lower. London oil prices now are through the $70 a barrel level and into territory not seen since the fall of 2014.

The notion that oil supply shortages and much higher prices may develop in the early 2020s or even sooner is starting to spread. The IEA and even the Saudis have been warning for several years that the precipitous drop in recent years of investment to find and develop new sources of oil will inevitably lead to lower production. The predominant view in the US, however, seems to be that domestic shale oil production will increase so rapidly that it will offset any decline in conventional oil production.  This view misses the point that global oil production is now on the order of 100 million b/d, demand is increasing at about 1.5 million b/d each year, and that US shale oil production is only about 5 percent of global production.

In recent weeks, the IEA’s view that there may be serious trouble and higher oil prices ahead has started to creep into a few sectors of the financial press. Some of this may be fueled by recent speeches by prominent US shale oil developers saying that the current shale oil boom may not last much longer. Few seem to be talking about peak oil as yet, and many are asserting that fossil fuels will continue to be the backbone of the global economy for decades to come despite the advent of electric vehicles and cheaper alternative fuels. As it is unclear just how fast the effects of climate change will force new polices, there is as yet little discussion of the issue outside of environmentalist circles.

The early 2020’s are not that far away. We should have a better insight into this question in the next year or two.

The OPEC Production Cut: Compliance with the production cut hit a new high in February and the inventory glut is shrinking fast, according to a joint OPEC /non-OPEC statement.  OPEC sources say the market is now expected to balance between the second and third quarters. The shrinking glut is fueling a debate over how long the curbs need to be in place. A ministerial panel will meet in the Saudi city of Jeddah on April 20 to review the deal in April.

It is widely recognized with OPEC and its allies that lifting the supply curb has to be done carefully to avoid a surge of new supply into the world oil market and a likely drop in prices. Last week Russian Energy Minister Novak said the deal would stand as long as the five-year average of crude oil inventories held by the world’s leading industrialized nations remained in surplus. “As soon as the ultimate goal of our deal is achieved — which is the balancing of the market — we will start considering gradual withdrawal.”

The vice president of Russia’s second-largest oil producer Lukoil said; “It will all depend on the American production.” If the pace of US shale oil growth continues, OPEC and Russia will need to exit the deal in 2020. By that time, the global industry will have started to feel the impact of the slashed investment in exploration and production in the past years. Lukoil, however, would support the idea of OPEC’s de facto leader and biggest producer Saudi Arabia to extend the oil production cuts into 2019. The Russians seem to appreciate that the oil markets will be a lot tighter in the 2020s and there will no longer be a need for negotiated production cuts.

US Shale Oil Production: Last week the EIA reported that US crude production in the lower 48 states was up by another 20,000 b/d which is the pace need to increase US oil production by another million b/d  during 2018. The US oil rig count was up by four last week which puts in at 152 more rigs than at this time last year. Canada, however, continued its losing streak, with a decrease of 58 oil and gas rigs, after losing 54 rigs last week, and a 29-rig loss the week before. Many of these rigs are moving to the US where the weather is better and the prospects for early success are better for the time being.

2.  The Middle East & North Africa

Iran:  The big story last week was the selection of John Bolton as President Trump’s new national security adviser and CIA director Pompeo as US Secretary of State. The conventional wisdom is saying that his move greatly increases the likelihood of a US exit from the Iran nuclear deal next month and the re-imposition of US sanctions on Iran. Since few, if any, other nations are likely to impose sanctions on Iran this time around, Iranian exports are unlikely to fall by the million b/d that occurred during the last sanctions.

May 12 is the next deadline for the US to waive sanctions on Tehran as part of the Joint Comprehensive Plan of Action. Trump has said he would refuse to authorize that waiver again if the US Congress and European partners do not “fix” terms of the nuclear agreement. Last week, the US State Department’s director for policy planning, said the US continues to negotiate with the UK, France, and Germany on a supplemental agreement to the Iran nuclear deal to fix three deficiencies identified by Trump that could keep the deal alive.

It is unclear what would happen if the US dropped out of the agreement, but there are many possibilities that could do severe damage to the world’s oil supply. Iran’s oil production averaged 3.83 million b/d in February, up from 2.8 million b/d in 2015, before the sanctions were lifted.

Iran drastically cut its gasoline imports in recent weeks as it started work on the second phase of doubling the Persian Gulf Star Refinery at Bandar Abbas to process 240,000 b/d. Tehran has been reliant on gasoline imports for years because of lack of refining capacity and the Western sanctions that had limited funding and spare parts for refinery maintenance.

The CEO of the French oil and gas company Total said last week the company would seek a waiver to continue the development of an Iranian gas field should the US decide to re-impose sanctions.  Last July, Total became the first Western energy firm to sign a deal with Iran since the easing of international sanctions in 2015, agreeing to develop Phase 11 of the South Pars offshore gas field with a total investment of $5 billion. Iran has nearly doubled gas production at South Pars, the world’s largest gas field, in the past year.

Iraq: Relations between Baghdad and its Kurdish dominated province of Kurdistan seem to be improving. Last week Baghdad agreed to pay the salaries of the Kurdistan region’s civil servants and security forces, according to a spokesman for the government said on Monday.  “The federal finance ministry transferred a cash sum $267 million to the regional finance ministry.” In recent weeks there have been reports that Baghdad has agreed to allow the Kurds to export oil from the Kirkuk oil fields. There has been no recent word on the scheme to move this oil by truck to a refinery in Iran, which would be a very dangerous undertaking as remnants of ISIS are still in the area.

The Kurdistan Regional Government has signed an agreement with its biggest natural gas investor to increase production from the Khor Mor gas field, which had been tangled in legal disputes. The deal should provide a much-needed fuel supply to Kurdistan’s power plants.

Saudi Arabia: The news of the week concerned Saudi plans for OPEC and Russian-led production curbs introduced in 2017 to be extended into 2019 to tighten the market. This news was enough to offset the US’s imposition of tariffs on $60 billion of imports from China and the beginning of a trade war that could do serious damage to the global economy.

The on and off IPO for Saudi Aramco could still take place this year. Early last week Saudi Arabia seemed to be cutting back on plans for a public offering for oil giant Aramco, moving ahead with a listing next year solely on the Saudi stock exchange while taking more time to decide if listing on the New York or London exchanges was worth the trouble. Aramco could be facing suits stemming from Saudi citizen participation in the 9/11 attacks, and from more financial disclosure requirements than they would like.

By weeks end, however, Saudi Energy Minister Khalid al-Falih was saying that the offering may still move forward with an initial public offering for the oil company on an international exchange such as London or New York in the second half of 2018, despite previously raising doubts it might be delayed to next year. The Minster is accompanying the crown prince, Mohammed bin Salman, on a two-and-a-half week visit to the United States to drum up investments in the plan to diversify the Saudi economy.

3.  China

The launch of China’s yuan-denominated oil futures on the Shanghai Exchange this week will mark the culmination of a decade-long push by China to have more power in pricing crude sold to Asia. China’s ultimate goal is to create a yuan-denominated global crude benchmark.  The contract will comprise of seven grades that can be accepted for delivery: Dubai Fateh, Upper Zakum, Oman Export, Masila, Qatar Marine, Shengli and Basrah Light. The initial focus will be on Basrah Light, given it is the most abundant of the grades that are acceptable for delivery. Some believe that a significant proportion of contracts will be held for physical delivery. Yuan-denominated trading and a blend of new rules and regulatory burdens will likely hamper initial trading on the Shanghai Exchange according to executives at a dozen banks and brokers and experts involved in the launch.

On Friday the Shanghai Futures Exchange announced that it had set the opening price for the front month of its crude futures contract at $65.80 per barrel.  Many are worried that the Shanghai Exchange will denominate transactions in yuan that will never gain traction in the world oil market. There are problems with how freely the government will allow money to flow in and out of the country amidst a clampdown on capital outflow. Some are concerned about Beijing’s tendency to intervene in its commodity markets in recent years to counteract developments the government does not like.

Meeting China’s ever-rising demand for natural gas, especially in the heating season, will be challenging due to limited domestic output, slow pipeline imports and distribution network bottlenecks. However, experts believe a natural gas shortage is unlikely next winter as higher liquefied natural gas imports will help bridge the supply-demand gap.  China won’t surprise the world again during next winter season despite its higher natural gas demand, as supply-demand restocking activity by major LNG imports will help alleviate the gas shortages in northern China.

The Power of Siberia natural gas pipeline from Russia to China is 75 percent complete. At present, 1,012 miles of the pipeline are built. Gazprom says it will start supplying China’s CNPC with natural gas as planned on December 20, 2019. Gazprom has a 30-year contract with CNPC for the supply of an annual 1.3 trillion cu ft of natural gas and completion of the pipeline is among Gazprom’s top priorities. Gazprom and CNPC have also discussed another pipeline from Russia to China via the western route—the so-called Power of Siberia 2 pipeline.

Natural gas from basins in southeastern Siberia could start moving through a natural gas pipeline to China within the next five years, Gazprom announced last week. The Kovyktinskoye field near Irkutsk in southeastern Siberia is unique given its larger volume of estimated gas reserves.  Work is underway to design the site structures and facilities for production and gas transmission.  It is planned to start feeding gas from Kovyktinskoye into the Power of Siberia gas pipeline in late 2022.

Several Chinese independent oil refiners, commonly known as ‘teapots’, are getting ready to start buying ethanol and blending it with their fuel to meet China’s new regulation that says, by 2020, gasoline in the country should contain 10 percent ethanol. Ethanol consumption in China would at least quadruple in the next three years due to this nationwide mandate.

4. Russia

Russia’s Energy Minister Alexander Novak said his country would continue to comply with the OPEC oil production cut deal until the end of this year and even into 2019 if need be. However, leaders of Moscow’s oil industry are beginning to express skepticism about the agreement.  Rosneft CEO Igor Sechin, a close ally of Russian President Vladimir Putin, has expressed skepticism about the effectiveness of the output reduction pact given that US shale producers, who are not participating, continue to ramp up production. If the production cap is extended into 2019, Rosneft may have to postpone major energy projects that are in the planning stage.

5. Venezuela

The situation continues to get worse. In recent years, the Chinese have loaned Caracas some $50 billion which was to be paid back in oil shipments. Reuters says some $20 billion is still outstanding. Beijing seems to have extended the payment period on the loans so now only the interest is being paid. Oil being shipped to China brings in no revenue to pay for food imports.  Recent reporting suggests the Chinese seem to be writing off the Maduro government as a lost cause and will no longer extend support.

Washington is exploring options to impose more sanctions on Venezuela’s oil sector, a senior US official said last week, after the White House issued an executive order barring the use of Venezuelan cryptocurrencies. “We are considering all options, including oil sector sanctions options, and are actively considering what steps we want to take and what the best timing is to maximize the effect of our actions.”   Washington imposed sanctions on the Venezuelan government and military officials in December in response to allegations of corruption and repression under the Maduro administration.

Despite Washington’s ban on the use of Venezuela’s cryptocurrency,  the “petro,” the state oil company, PDVSA said that President Maduro continues to authorize PDVSA collection of export revenues in petros.
In the meantime, Caracas’s oil revenues continue to shrink. OPEC currently places Venezuela’s daily oil production at around 1.6 million b/d. Independent analysts say this could easily fall by 400,000 b/d by the end of the year.

6.  The Briefs (date of the article in Peak Oil News is in parentheses)

Global energy demand grew by 2.1 percent last year, according to the International Energy Agency. With the global economy accelerating, that was more than twice as high as the rate from 2016-17. In part because of the increase in sales of large sport-utility vehicles and trucks in the world’s leading economies, oil demand grew more than 1.6 percent last year. That’s more than twice the 10-year average. (3/23)

Scraping tankers: The number of older VLCCs sent for scrap so far this year has been “somewhat astounding,” Clarkson Research states in its latest weekly report. Fellow broker Gibson reports that 15 VLCCs have been sold for demolition in 2018, with this year’s volume already exceeding the total for 2017. (3/22)

Ship quandary: The owners of 60,000 cargo ships are bracing for tighter emissions rules that are forcing them to make a multibillion-dollar choice: Start buying cleaner-burning fuel or invest in a device that treats the ship’s exhaust before letting it out. It isn’t an easy call. Retrofitting a vessel with a sulfur-trapping exhaust system called a “scrubber” costs as much as $10 million a ship, while cleaner fuels are about 55% more expensive than the ones shipping operators use now. (3/20)

Dutch cutback coming: Dutch economy minister Eric Wiebes will send a letter to the country’s Cabinet containing details of a major cut to extraction levels at the Groningen gas field, where earthquakes have been linked to gas extraction. The current production quota for the 2017-18 Gas Year could be cut by up to 2 Bcm. Dutch gas regulator SodM recommended a 12 Bcm/year cap on gas output from Groningen be introduced. (3/19)

Germany diversifying: Bloomberg reported that Merkel’s government is seeking to build a liquefied natural gas industry in Germany basically from scratch to reduce the nation’s dependence on supplies arriving by pipeline from Russia and Norway. Merkel backs all initiatives supporting further diversification of gas supply — whether from different regions or means of transporting gas. The move comes as natural gas resources from the UK and the Netherlands are depleting, and Germany is forced to rely more on Russian gas. (3/21)

Israel-to-Egypt gas: In February, Noble Energy and its partners reached an agreement with the Egyptian company Dolphinus Holdings to sell gas from offshore Israel to Egypt, a deal that could jumpstart a wider campaign to develop natural gas in the Eastern Mediterranean. The deal is politically risky for Egypt, where dealings with Israel have historically been taboo. (3/22)

Vietnam has suspended a second oil drilling project in the South China Sea in less than a year, after pressure from China which claims a large swath of the sea. Vietnam’s government ministries have suspended the project until the country’s decision-making body, the politburo, makes the final decision whether the project should be suspended or terminated indefinitely. (3/24)

Pressuring South Sudan: The US on Wednesday placed sanctions on 15 South Sudanese oil-linked operators it said were substantial sources of revenues for the government, aimed at increasing pressure on President Salva Kiir to end the country’s conflict. (3/24)

Offshore Senegal: FAR Ltd. and its partners announced the completion of a geotechnical study of a 2,900 square mile permit area that includes the flagship SNE oil discovery. The results revealed another 198 million barrels to the estimated 641 million barrels in the best estimate scenario of contingency reserves. FAR has 11 successful wells drilled to date. (3/21)

Crude oil could turn Ghana into one of the fastest-growing economies in the world. This is the message coming from analysts as the West African country is set to start benefitting from the development of its largely untapped oil wealth. There are only three fields in Ghana that are already producing, out of 21 license blocks. Of these, 14 are in ultra-deep waters, which makes their development costlier, and five are in shallow waters. The country has a democratically elected government headed by a president that is all for foreign investment and all against foreign aid, which is a good combination for investors in Ghanaian oil. (3/20)

Guyana has historically been entirely dependent on oil imports. In the past three years though, Guyana has sprung up as one of the hottest oil spots in the region, with ExxonMobil alone accounting for seven hydrocarbon discoveries in one single exploration block. However, the pace of discoveries will only highlight the deficiencies of Guyana’s political system; there remains a serious risk that these world-class finds might be jeopardized by politics. (3/22)

The US oil rig count increased by four this week to 804, Baker Hughes reported. Gas rigs were up by 1 to 190.  The combined rig count now stands at 995.  It has increased by 71 during 2018 and is up by 152 over this time last year. (3/24)

Data war: A battle for big data is brewing in the oil patch. The service companies that map underground pockets of oil, drill the wells and lift crude are generating vast new amounts of data they never before realized could be valuable. But their exploration customers are essentially saying hands off to anything coming out of their wells, including the streams of zeros and 1s. So, who owns the data? (3/20)

With gasoline prices about 10 percent higher than they were at this point last year, the situation may be near the point of US economic strain. The AAA posts a national average retail price of $2.56 for a gallon of regular unleaded gasoline. That’s almost 27 cents more than this date last year. Gasoline demand across the US economy is at a point not usually seen until summer months when more vacationers hit the road.. (3/21)

In Arctic Alaska, the warmest winter on record has hit local oil production as temperatures hampered industrial machinery designed to optimize output when conditions are most frigid. Production of the North Slope grade of crude oil has averaged about 518,000 b/d through the current fiscal year, down from the approximately 533,000 b/d predicted last fall. Warmer temperatures are largely to blame for that drop. (3/20)

Gas net exports: The US exported more natural gas than it imported in 2017, marking the first time since 1957 that the US has been a net natural gas exporter. The transition to net exporter occurred as natural gas production in the US continued to grow, reducing imports from Canada and increasing exports, by pipeline and as liquefied natural gas. The US surpassed Russia in 2009 as the world’s largest natural gas producer as shale gas production drove overall increases in natural gas production. Natural gas production reached an average of 73.6 billion cubic feet per day during 2017. (3/20)

Alaska LNG project update: Gov. Bill Walker remained upbeat over his state’s $45-$65 billion liquefied natural gas LNG export project proposal, Alaska LNG, even as global oil and gas prices tanked, reaching multi-year lows, even as all of its original partners, including ExxonMobil, ConocoPhillips, and BP pulled out – leaving the state, under the umbrella of the Alaska Gasoline Development Corp. (AGDC), being the sole project partner. The Federal Energy Regulatory Commission (FERC) on Monday set a timeline for the project to receive its final environmental impact statement, by December 2019—an important step according to Walker. The problem to date for Walker and the project had been attracting investors. Unlike its LNG export project counter parts in the Lower 48, the Alaska LNG project’s CAPEX is seen as prohibitive, one of the reasons other project partners pulled out, in addition to lower oil and gas prices. (3/19)

Natural gas under attack? Even as CO2 emissions from burning natural gas are much lower, there are questions over the climate benefits if lower CO2 is offset by higher methane emissions, which typically come from the drilling and extraction of natural gas, and its shipment via pipeline and local distribution lines. With the coal industry a dead man walking, environmental groups have turned their sights on natural gas as an enemy of the climate. (3/20)

Natural gas pushback: Natural gas overtook coal as the top fuel for making electricity in the US two years ago. But its brief reign is under assault in some parts of the country. State regulators, renewable-energy advocates, and environmental groups are arguing that some existing and proposed gas plants aren’t needed or should be replaced by renewable energy. In states including Arizona, Michigan and Massachusetts, the future of gas plants is being questioned. But nowhere is gas under more fire than in California, where regulators are saying no to new gas plants and looking to get rid of older ones. (3/19)

Offshore operators in the US Gulf of Mexico are beneficiaries of the Trump administration’s efforts to increase offshore production here — in large part by upending financial, environmental and safety regulations that the companies oppose. Those rules include safety measures put in place after the explosion and US sinking of the Deepwater Horizon rig in 2010, a disaster that killed 11 people and resulted in the largest marine oil spill in United States’ drilling history. (3/24)

The US Bureau of Land Management auctioned off more than 51,000 acres in southeastern Utah for oil and gas development, a sign of strong industry demand in a region conservationists have vowed to protect. The Utah lease sale included terrain near the former boundaries of the Bears Ears National Monument, whose size was scaled back by the Trump administration last year, as well as the Hovenweep and Canyons of the Ancients monuments. (3/22)

The Trump administration has dubbed Wednesday’s Gulf of Mexico oil and natural gas lease sale as the largest in US history and, Interior Secretary Ryan Zinke has called it a “bellwether” for America’s offshore energy future. But on Tuesday, US offshore representatives downplayed the market and policy significance of the Gulf lease sale. (3/21)

The state of Pennsylvania wants a federal judge to halt the bankruptcy of Philadelphia Energy Solutions, arguing the refiner owes an estimated $3.8 billion in fuel taxes, according to a court filing on Friday. The state said the refiner must make several changes to the proposed restructuring plan to ensure the taxes are paid before it can support the plan. The $3.8 billion figure is significant for a refiner that had just $43 million in cash on hand when it filed for bankruptcy protection in January. (3/20)

Overall electricity use in US manufacturing declined 10 percent from 2006-2016, based on data from the US Census Bureau. Most manufacturers get their electricity from grid purchases. From 2006 through 2016, the manufacturing sector purchased 87 percent to 89 percent of their electricity from the grid and generated the remaining 11 percent to 13 percent onsite. (3/24)

Electric sales down: 2017 was another down year for the US electric utility industry–despite a reasonably robust economy and increasing population. The 2.1 percent drop was bigger than usual. In seven of the past ten years, electricity generation in the US has declined. (3/23)

EV hotspot: In proportion to its population, the Nordic region—Denmark, Finland, Iceland, Norway, and Sweden—is strikingly ahead of the rest of the world in adopting electric cars. With almost 250,000 electric cars at the end of 2017, the five countries account for roughly 8 percent of the total number of electric cars around the world. Norway, Iceland, and Sweden have the highest ratios of EVs per person, globally. Further, the number of electric vehicles (EVs) in the Nordic region is projected to reach 4 million cars by 2030—more than 15 times the number currently in circulation.

Chinese e-buses: German intercity bus company FlixBus is investing in e-buses produced by Chinese bus makers and planning to test them on their long-distance routes for the first time in the world. According to the Munich-based bus company, the first all-electric e-bus will begin test operations between Paris and Amiens, France in April. The electric buses are made by China’s Zhengzhou Yutong Bus Co. and by China bus maker, BYD. (3/21)

Methane time bomb: Scientists fearing the mass release of greenhouse gases from the carbon-rich, frozen soils of the Arctic have had at least one morsel of good news in their forecasts: They predicted that most of the gas released would be carbon dioxide, which, though a greenhouse gas, drives warming more slowly than some other gases. Now even that silver lining is in doubt. New research released Monday suggests that methane releases could be considerably more prevalent as Arctic permafrost thaws. (3/20)

Fusion mirage? There has been a lot of buzz about fusion in the past few days, after the announcement of “a dramatic leap forward” from a collaboration between MIT and a newly formed private company. This was followed by declarations that “the world’s energy systems will be transformed” by putting a working power plant on the grid within 15 years.  Those projections may be overly optimistic. (3/19)

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