Quotes of the Week
[Regarding natural gas prices:] “Going into summer, producers know it’s going to be a massacre.”
Sami Yahya, a Platts Bentek analyst.
“Global demand and supply will balance very quickly because we’re seeing an extended decline from producing fields.”
Per Magnus Nysveen, Rystad’s head of analysis, saying the world oil market will re-balance this year.
1. Oil and the Global Economy
2. The Middle East & North Africa
5. The Briefs
1. Oil and the Global Economy
Oil prices finished a holiday-shortened trading week on Thursday relatively unchanged. Oil had been a bit higher on Monday and Tuesday but then underwent a $2 a barrel decline on Wednesday after the weekly stocks report showed a 9.4-million-barrel increase in the US crude inventory. Prices recovered by a dollar or so on Thursday to close at $39 in New York and $40 in London, partly in response to a 15-unit drop in the US oil rig count. The 50 percent price increase since January still seems to be based mostly on unrealistic expectations that the large oil exporters will cut production enough to bring supply and demand back into balance. So far, however, crude stocks have continued to rise, and production cuts have been minimal.
The theory prevalent in recent weeks that the so-called “missing 800,000 b/d” of world oil production was behind the recent price rise was discounted by the IEA and a second major bank last week as wishful thinking. There has always been a gap in following the world’s oil flows as many countries do not accurately report their production, consumption, and storage numbers. The IEA says that missing barrels is nothing unusual and has been present in the Agency’s accounting since it was formed.
The exporters meeting, which is to include Russia and much of OPEC, is still scheduled for April 17th in Doha. Given that the countries attending have little expectation of substantial production increases shortly, any decision about a production freeze reached at the meeting is unlikely to have an impact on the 1-2 million b/d of excess capacity that is still estimated to be flooding the market.
Unless there is major geopolitical upheaval such as a governmental collapse in Venezuela, Brazil, Nigeria, or Iraq, there is unlikely to be a major curtailment of the oil supply in the next six months. While there has been a strong demand for gasoline in the US due to the low prices, this may fade as retail prices rise again. While China’s demand for crude oil has been strong recently, much of the increase in imports has been refined and exported as oil products to Asia thereby cutting demand by refineries elsewhere in Asia.
There clearly are bad times ahead for the future of the oil industry as it becomes apparent just how much capital spending has been cut on projects that were supposed to come into production later this decade. Last week saw a spate of stories outlining the woes of the industry. Consulting firm Wood Mackenzie says that some $500 billion worth oil and gas projects have been deferred due to low oil revenues — up from $400 billion in the firm’s previous estimate. OPEC supply is expected to grow by some 300,000 b/d this year, mostly from Iran and Iraq. However, global demand for oil is expected to grow by a million b/d this year, gradually clearing away the excess supply and inventories so that by 2017 prices will be rising again.
The IEA is becoming concerned that unless there is a major increase in oil industry investments in 2017 and 2018, there will be a large increase in oil prices towards the end of the decade as supply can no longer meet demand. The Agency also expects that oil prices will average between $35 and $40 a barrel this year which is not enough to encourage a surge in investment in the short run. In the meantime, the fiscal condition of much of the US shale oil industry continues to deteriorate as more loans become due and more companies declare bankruptcy. Many banks are reducing their exposure to the oil industry and the flow of capital that built and sustained US shale oil production is starting to dry up.
The US oil industry is expressing concern that recent actions by the Obama administration, such as the air quality regulations, blocking the XL pipeline, and stopping the sale of oil leases off the Atlantic coast signifies that the government is more concerned about the environment than the economic well-being of the industry. The industry sees several technical regulations that are well below the radar of most observers as pointing to an effort to slow oil production. As is normal, there is little concern about the ever-increasing environmental problems the world is facing.
2. The Middle East & North Africa
Iran: Tehran is having a problem regaining its former oil markets in Europe. US sanctions on money transfers with Iran are still in place. This situation has oil importers worried that they might provoke Washington’s wrath and economic sanctions by violating some regulation. Bartering for oil for some other product that Iran needs is satisfactory for some Asian importers. However, given the world oil glut and Tehran’s reluctance to make major price concessions, it is unlikely that the average European importer is interested in the effort to concoct a barter deal to obtain oil.
Tehran is reopening the issue of building a pipeline to supply natural gas to Pakistan. In recent years, the sanctions had brought the project to a halt. Now, the Iranians are as anxious to find a new customer for their natural gas as the Pakistanis are in finding a way to overcome their chronic energy shortages. Even if the pipeline is built, Pakistan is years away from increasing its natural gas distribution infrastructure to handle the increased flow of gas. The new pipeline, which would run through unruly parts of Pakistan, would be in danger of constant sabotage.
The long-term feud between Washington and Tehran continued last week with the Justice Department accusing Iran of attempting to hack the computers controlling a small dam north of New York City. Iran continues to test missiles, possible in violation of UN mandates, to show that it is still a military force to be reckoned with.
Syria/Iraq: The ceasefire is generally holding with the remaining Russian aircraft supporting a Syrian offensive that retook Palmyra over the weekend. ISIL is coming under increasing military pressure as several of the world’s most powerful and modern air forces attack ISIL’s largely defenseless ground forces. Important ISIL leaders are being killed at an increasing pace. The organization can no longer mount offensive operations outside of terrorist bombings and has few assets other than to heavily tax and dragoon people living its occupied territory into its armed forces.
Moscow and Washington say they are interested in pushing for a political settlement in Syria. The current stumbling block is whether the Assad government, which is Russia’s major friend in the Middle East will remain in power or will be country taken over by some combination of Sunni groups which would seek revenge against the minority Shiites that have ruled and abused them for decades. Given the anarchy we have seen in Iraq and Libya, the prospects for a long-term peaceful settlement in a region where multiple tribes and religions are lumped together does not seem good.
In Iraq, an offensive to retake Mosul is underway. So far the attack has been confined to retaking villages on the roads to Mosul and cutting off the ISIL forces in the city from sources of supply. Meanwhile in Baghdad, the government is in disarray as the prime minister attempts to reorganize the cabinet amidst large demonstrations by radical Shiites outside the green zone. The oil minister has stepped down, and in Basra where most of the oil is located, provincial leaders are moving to assert financial autonomy from Baghdad. Provincial leaders say they are getting little funding from the central government which is strapped for cash and controls the sale of oil. Some observers are saying that the carefully balanced cabinet now being reshuffled could destabilize the government and bring on yet another existential crisis.
In the oil sector, Iraq exported its first ever shipment of natural gas in the form of condensates. Iraq does not as yet have any gasification facilities. Baghdad expects that gas from Iran to run its power stations will start flowing shortly through the newly built pipeline. The pipeline would make a prime target for rebel groups, including ISIL, opposed to greater Iranian influence in Iraq.
Libya: Platts reports that Libyan oil production fell last month by 10,000 b/d to 360,000 – well below the 1.6 million the country was producing before the troubles began. Libya reasserted that it has no intention of going to the Doha conference and agreeing to freeze its production at current levels. Libya has a rather small population and still has considerable financial reserves accumulated during the days of high oil production and high oil prices.
Saudi Arabia/Yemen: It has been a year since the beginning of the Saudi air strikes on Houthi, allied Yemeni army units in Yemen. Thousands of civilians have been killed as collateral damage in the air strikes. Last week it was reported that a Mirage jet fighter flown by UAE pilots was shot down by a Russian SA-7 missile while attacking an al Qaeda position in southern Lebanon.
The UN envoy to Yemen announced another ceasefire last week. The fighting is to stop at midnight on April 10th, and a new round of peace talks are to start in Kuwait on April 18th. Previous attempts at a ceasefire have failed. However, Yemeni Foreign Minister al-Mekhlafi said he is confident that the talks will take place. So far some 6,300 Yemenis have died in the fighting which is widely viewed as a proxy war between Iran and Saudi Arabia.
Low oil prices continue to impact the Saudi economy despite its large financial reserves. The latest sector to be hit are the foreign workers doing much of the work in Saudi Arabia. Their numbers have grown from 5.3 million in 2000 to 10.3 million or more than one-third of the 28 million living in the country. In the case of males in Saudi Arabia nearly 40 percent are now foreign workers. As these people are let go and sent home the economic impact will be felt heavily across the region. According to the UN 1.9 million foreigners resident in Saudi Arabia are from India; 1.3 million from Indonesia; 1.1 million from Pakistan; 970,000 from Bangladesh, 730,000 from Egypt; 620,000 from Syria; and 580,000 from Yemen. In 2015, these foreign workers remitted some $36 billion to their families back home providing a major boost to many poorer economies.
The oil slump has resulted in a major push to find more jobs for native-born Saudis who suffer from a very high unemployment rate and have subsisted on handouts which the government can no longer afford. So far there have been few signs of political instability in the country, but there are signs that this may not always be the case. Political instability in Saudi Arabia could be disastrous for the world’s oil industry.
While China’s economy grew at its slowest pace in 25 years during 2016, Beijing announced over the weekend that industrial profits for January-February 2016 were up by 4.5 percent over last year. This situation is seen by some as a sign that the economic slowdown which is widely forecast to continue this year may be responding to the economic stimulus measures that the government has instituted in the past year. While there may be some short term benefits to industrial profits, the serious underlying problems of too much debt and massive overcapacity in some industries remain. Whether China can work out these problems without a major impact on its economy remains to be seen. In the meantime, the government has gone on a public relations offensive to reassure the world that a 6.5 percent GDP growth this year is well within reach.
Standard Chartered Bank is predicting that China’s oil imports will increase by as much as 600,000 b/d this year as the country continues to fill its strategic reserves and ups its efforts to refine and export petroleum products to the rest of the world. Crude imports in February surged past 8 million b/d for the first time, giving China a firm hold on the title of the world’s largest oil importer and, of course, increases its vulnerability to supply disruptions that could grow out of the Middle Eastern situation.
China’s diesel exports were up by 8.6 percent in February. The 792,000 tons exported last month were seven times those in February 2015. Some believe that there will be another major increase in diesel exports this month. Retail prices for oil products were frozen in China at a level corresponding to $40 crude on the international markets. With oil below this level, it became profitable for Chinese refiners to sell their products domestically rather than on the very low international markets. Chinese refiners now are interested in lowering their stockpiles by increasing exports. Their “crack spread” which is the profit they can make on each barrel they refine has increased by 43 percent since January.
A new report by Greenpeace ties the massive consumption of coal used to produce electric power to a water shortage developing in northern China. The environmental organization says that some 7.4 billion cubic meters of water are consumed by China’s power plants each year at a time when a decades-long drought is reducing the availability of water. Two years ago, China had 45 percent of the world’s coal-fired generating capacity and half of these plants were located in water-short regions. To make matters worse, Beijing is planning to increase coal-fired electric production which would add to the water shortage. To reduce air pollution in cities, the government is planning to establish 14 large “coal bases” around the country where the mining and burning of coal would take place together in areas far removed from cities. Three of these bases are in northern China where water is already in short supply.
Last week the New York Times focused in on Moscow’s efforts to keep its economy afloat in an era of extremely low oil prices. Back in the days of $100 oil, the Russian government got about $74 from every barrel sold; $15 went to production and shipping costs; leaving about $11 in profits for the oil companies. Now with around $30-40 a barrel, Moscow now gets only $17 or so a barrel and with production costs steady at $15 oil company profits are down to $3 a barrel. With half of Russia’s federal revenue coming from oil sales, the drop from $74+ to $17 has been a disaster. To many Russian officials, the only answer is higher taxes on the oil companies.
The problem is that the Russia’s aging oil fields require constant capital injections to explore for and drill new wells; otherwise production will begin to wither away. A recent Russian energy report estimates that production would fall by 50 percent in the next 20 years unless large amounts of capital are spent on finding more oil and drilling more wells.
The Kremlin is currently considering a new tax on oil companies to be taken from the meager $3 a barrel profit they are currently earning. While this would hold Russia’s budget together in the short run, in the long run it is the equivalent to eating its own seed corn and the results will be disastrous for the oil industry.
Some believe that Russia is at an economic/political crossroads. The government desperately needs large amounts of money to support its military establishment to the extent that it can meddle in the Middle East and confront the West. It also needs large amounts of money to keep its Islamic peoples under control and to support rising unemployment as its economy contracts.
Moscow is currently engaged in provoking confrontation with the West to raise nationalist feeling among its peoples during the current economic downturn. Without the oil revenues Russia would deteriorate into a second or third rate world power which is anathema to its leaders’ self-image. Much of Russia’s future and relations with the West is riding on the oil tax decision which will be made soon.
5. The Briefs
The International Monetary Fund has hinted that it will next month lower its 3.4 percent growth forecast for the global economy with one of the main reasons being the failure of cheap oil to deliver a widely anticipated fillip to major economies. (3/25)
Declines to dominate: In 2016, for the first time in years, drillers will add less oil from new fields than they lose to natural decline in old ones. About 3 million barrels a day will come from new projects this year, compared with 3.3 million lost from established fields, according to Oslo-based Rystad Energy. By 2017, the decline will outstrip new output by 1.2 million barrels as investment cuts made during the oil rout start to take effect. That trend is expected to worsen. Companies cut capital expenditure on oil and gas fields by 24 percent last year and will reduce that by another 17 percent in 2016, according to the IEA–the first time since 1986 that spending will fall in two consecutive years. (3/23)
In Japan, the US is set to become one of its top 10 oil suppliers in May when roughly 2 million barrels of US crude and condensate arrive during the month, just after Washington lifted crude export restrictions put in place 40 years ago. (3/24) [Broken record note: the US remains the world’s second-largest net importer of oil and petroleum products.]
Algeria’s Sonatrach is shifting strategy to offer foreign firms direct negotiations to buy stakes in 20 oil and gas fields in a bid to attract investors and increase output, a source at the state energy company said. The campaign to bring in energy investment comes at a crucial time for the North African OPEC producer as it tackles lower revenues and stagnating production. (3/23)
In Algeria, BP and Statoil pledged to reduce or pull out staff completely at two natural gas plants following a March 18 attack by militants on the Ain Amenas natural gas plant in eastern Algeria. Algeria’s energy infrastructure has been protected by the army, especially since a 2013 attack on the Ain Amenas gas plant, also operated by BP and Statoil, during which 40 oil workers were killed. (3/22)
South Sudan’s oil ministry has concluded that oil production is in quick decline, and future production will not reach even half of its peak 2010 levels even if all the oil fields began pumping again. South Sudan has developed oil reserves in Upper Nile and Unity states, but only fields in Upper Nile are currently producing due to insecurity in Unity state. Even if the Unity fields started production this year, oil production would quickly peak at no more than 175 thousand barrels per day, less than half of its peak annual average, 360 thousand barrels per day in 2009. Production would then drop rapidly to less than 100 thousand b/d by 2021 if new fields aren’t developed. (3/24)
In Mozambique, Exxon Mobil is in advanced talks to acquire a stake in a giant natural gas development project from Italy’s Eni, a sign that major oil companies are again hunting for deals after energy prices crashed in 2014. (3/25)
In Brazil, troubled state-run oil company Petrobras reported its biggest quarterly loss ever on Monday after lower oil prices and higher borrowing costs forced it to write off $13.79 billion in assets and investments for last year. (3/22)
Canadian companies Suncor and Canadian Oil Sands Ltd. announced their merger was completed under the terms of a hostile offer launched last year. (2/23)
The US oil rig count fell by 15 to 372, after one rig was added last week, Baker Hughes said Thursday. More than 150 rigs have been parked since the start of the year. Natural gas rigs gained 3 to 92, bringing the combined rig count down by 12 units to 464. (3/25)
US energy firms cut oil and natural gas rigs for a 14th week in a row to the lowest level since at least 1940. Looking forward, analysts forecast the total rig count will bottom in a couple months before recovering later this year when they expect energy prices to rise. (3/25)
US crude oil production from the Lower 48 states from new wells (drilled since the start of 2014) made up 48 percent of total US crude oil production in 2015, up from 22% in 2007. In 2015, production from tight formations—which include, but are not limited to, shale plays—accounted for more than 4 million b/d, or 50 percent of total US oil production. US oil production from tight formations increased from 0.5 million b/d in 2009 to 4.6 million b/d in May 2015. (3/23)
GOM downer: A lack of interest in new oil and gas acreage for sale in the US waters of the Gulf of Mexico may be indicative of a weak energy market, the government said. (3/25) [NOTE: Ya think? Call this a keen eye for the obvious…]
Gas guzzlers: The USA will probably consume a record amount of gasoline in 2016, passing the previous peak set in 2007, and the prospect is helping lift crude oil prices. Recent data indicates the country is on track for its biggest-ever driving season this summer. (3/22)
US average gasoline prices climbed back above $2 a gallon on Thursday for the first time since early January. The national average is now some 31 cents higher than a month earlier, a climb that has coincided with crude oil prices rebounding back toward $40 a barrel. (3/25)
Volumes of US crude exported by tanker have declined 5 percent in 2016 to an average 325,000 b/d, according to Clipper Data, a market intelligence service. Waterborne exports were 342,000 b/d in the first three months of 2015. The data so far suggest a big net addition to supplies will be slow in coming. The US was already sending hundreds of thousands of barrels per day to Canada before the export ban was lifted. The Canada trade has become less profitable this year, and exports elsewhere have yet to make up the difference. (3/24)
Bad loans are likely to outnumber good ones soon in the US oil patch, an indication of the pressure on energy companies and their lenders from the crash in prices. In response, several major banks are reducing their exposure to the energy sector by attempting to sell off souring loans, declining to renew them or clamping down on the ability of oil and gas companies to tap credit lines for cash. (3/25)
Bankruptcy: Denver-based oil exploration company Emerald Oil filed for chapter 11 protection Tuesday night in US Bankruptcy Court in Wilmington, Del. (3/23)
Share offerings: More than a dozen companies in the hard-hit exploration and production energy industry have announced new share offerings this year – and have been rewarded in the stock market for the strategy. Although it might seem that companies would upset their investors by diluting earnings per share when they added more stock, most of the 15 companies that have done so have actually outperformed their peers. (3/26)
Energy policy: in March 2012 President Obama supported “all of the above” resource strategy. Now he has abandoned it in his recent energy policy actions. He rejected the construction application for the Keystone XL pipeline; he is ditching the Atlantic Lease 260 sale from the proposed five-year offshore oil and gas lease sale program for 2017-2022; he has directed that the government tighten air pollution standards for offshore drilling. (3/23)
Advocacy group Bold Nebraska, which helped take on the Keystone XL pipeline, declared victory after state leaders passed a measure to control oil and gas waste. The Nebraska Legislature passed bill LB-1082 on a vote of 48-0-1 to enact stronger provisions governing the waste associated with hydraulic fracturing. (3/26)
The Rockefeller Family Fund said on Wednesday it would divest from fossil fuels as quickly as possible and “eliminate holdings” of Exxon Mobil Corp, saying the oil company associated with the family fortune has misled the public about climate change risks. (3/24)
The US Securities and Exchange Commission has ruled Exxon Mobil Corp must include a climate change resolution on its annual shareholder proxy, a defeat for the world’s largest publicly traded oil producer, which had argued it already provides adequate carbon disclosures. Exxon shareholders have never approved a climate change-related proposal, and last year they rejected by 79 percent a request that a climate expert be appointed to the company’s board. (3/24)
Chernobyl: In the middle of a vast exclusion zone in northern Ukraine, the world’s largest land-based moving structure has been built to prevent deadly radiation spewing from the 1986 Chernobyl nuclear disaster site for the next 100 years. (3/24)
Renewables rising: For the first time, in 2015, more investment went into renewable power generation than fossil fuel power plants, and most of the money went to emerging markets. (3/25)
For Virginia, the federal Bureau of Ocean Energy Management announced its consent for the first-ever wind energy research facility offshore Virginia. The research plan envisions the installation of two 6-megawatt turbines, which could generate enough power to meet the annual demands of 3,000 homes. (3/26)
Solar taking hits: Many U.S. states are considering dialing back solar-power incentives amid growing pressure from local electric utilities, potentially dealing a blow to the companies that install home solar systems around the country. (3/26)
Volkswagen introduced its BUDD-e electric vehicle concept at the US New York auto show. The first vehicle based on the all-new Modular Electric Platform designed specifically for plug-in vehicles, the BUDD-e with its 101 kWh battery pack offers a range of up to 373 miles (600 km) based on the New European Drive Cycle, or up to 233 miles (375 km) based on EPA drive cycle miles. (3/24)
Urine power? In the poorest parts of the world, energy is scarce. That is why some scientists are excited about the prospect of generating electricity from urine. Research has demonstrated that a little urine can be used to produce small amounts of electricity in a device called a microbial fuel cell, which relies on bacteria to generate power. (3/26)
The water link: An estimated three out of four jobs globally are dependent on water, meaning that shortages and lack of access are likely to limit economic growth in the coming decades, the United Nations said on Tuesday. (3/23)