Helping America Navigate a New Energy Reality

Peak Oil Review – 29 Aug 2016

By on 29 Aug 2016 in Peak Oil Review

Quote of the Week

“When it comes to scarce resources, the simplest solutions on the surface are not always the best ones.  You have to change people’s behavior, reassess society’s dependency on this resource and reduce consumption—otherwise society may, in fact, be more vulnerable to catastrophes than safer, despite clever solutions.”

Linda Kuil, Vienna Technology University, in a study on Mayan civilization and water resource constraints

Contents

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

1.  Oil and the Global Economy

Oil futures fell some 3 percent in New York and 2 percent in London last week, settling at $47.64 and $49.92 respectively.  The markets have become volatile of late with traders reacting to nearly every API or EIA report and every utterance from the Saudi or Iranian oil ministers. Last week the markets were pressured by numerous comments pro and con the possibility of an oil production freeze next month; a jump in Chinese diesel exports; comments by Federal Reserve Chair Janet Yellen that there could be a price-depressing rate increase sooner-rather-than-later; increased exports from Iraq via Kurdistan; the possibility of a ceasefire in Nigeria; sluggish US and Chinese economies; and a jump in US crude and oil product inventories.

All this nets out to nobody-knows-where-prices-are-going, but several analysts say that prices will trade in the $42-$50 range for a while. Some forecasters see a risk to the downside for a while, but everybody believes 2017 will be much better as the effects of massive cuts in capital spending take hold. The US Commerce Department cites reduced spending by the energy industry as one of the reasons that the US economic growth was lower than forecast in the first half.

With a month to go before the Algiers meeting that is to consider a production freeze, we are likely to see continued posturing from the various oil exporters. All would like to see higher prices, but none seem willing to give up customers and market share to achieve this goal, preferring that the cuts be left to others.  In the meantime, the political situation in the Middle East continues to get worse, the world climate gets hotter, the global population continues to grow, and the Chinese economy that has been the world’s major growth engine for several decades continues to sputter.

2.  The Middle East & North Africa

Iran: It was a busy week in Tehran. On Monday the Iranians kicked the Russians out of an Iranian airbase that Moscow was using to bomb Syria. It seems that the Russians got carried away in touting their new role as a major military power in the Middle East and Tehran took umbrage at what was supposed to be a confidential arrangement. Tehran finally announced that its oil minister would join the talks on a production freeze in Algeria next month, but reiterated that it would not be freezing its production until its rightful market share was achieved. Most observers are saying that this position kills any chance that a freeze will actually occur.

The surge in Iran’s oil production that has been going on since the end of most sanctions seems to be slowing with the country pumping only 3.85 million b/d this month, little changed from the “above 3.8 million” figure announced in June. With Nigerian production slipping by at least 700,000 b/d this year, Tehran had little trouble filling the gap earlier this year.  However, with Iraq and the Gulf Arabs pumping as fast as they can and cutting prices where necessary to maintain market share, the Iranians may not achieve their 4 million+ b/d goal in the near future. Tehran is still hampered by residual sanctions which make doing business with foreign purchasers more difficult.

Domestic politics is likely behind the aggressive stance that Tehran took against US warships transiting the international waters of the Strait of Hormuz. Sending small, fast boats directly at US warships in international, but probably disputed, waters led to the US firing warning shots. As Iran gets more deeply involved in the various Middle Eastern wars and confrontations, the possibility of miscalculation continues to grow.

Syria/Iraq: The situation in Syria becomes more confused with each passing day. The Turks continued their offensive into Syria over the weekend with the goal of preventing US-backed Syrian Kurds from capturing the territory along the Syrian-Turkish border. Ankara fears that this would only give the Kurdish separatists that have been in rebellion against the Turkish government for three decades a base from which to continue their insurgency.

The most striking feature of the Syrian civil war is the multiple conflicts going on simultaneously and the range of governments supporting one side or another in the conflict. With unlimited foreign resources including men and military supplies being poured into the conflict, there is no clear end in sight. In the meantime, the Syrian populace is being slaughtered or driven from the country by the endless, sometimes indiscriminate fighting.  What is left of the country’s oil production is mostly in the hands of ISIL and is slowly being bombed to pieces by Russia and the US coalition.

It was also a busy week in Iraq. The new oil minister reiterated that Iraq was willing to play an active role within OPEC to support oil prices, but will continue to increase production and expand its market share.  He sounds a lot like the Iranian oil minister.  As most of the smaller OPEC members are nearly economic basket cases, Iran and Iraq are expecting the Saudis, the other Gulf Arabs, and Russia to do the cutting.

Baghdad announced last week that it was going to release some 150,000 b/d from its northern oil fields for shipment through Iraqi Kurdistan to outside markets. This oil has been shut in for several months while the Iraqis and the Kurds negotiated its terms of sale. Iraq’s oil minister said that the oil fields were being damaged by the prolonged outage and had to be restarted. However, Baghdad stepped up pressure on the Kurds by announcing that it was considering shipping the oil from its northern fields to Iran instead of through Iraqi Kurdistan. This arrangement could be a swap deal under which Iraq would send its oil to Iranian refineries, and a similar amount of Iranian oil would be marketed abroad for the Iraqis.

Oil exports from Basra have averaged 3.2 million b/d so far in August which is slightly higher than July exports. The government is pressuring the foreign oil companies operating in the country to step up production. As the foreign companies are being paid by the government to produce oil, new investment will have to be done without any assurances that the companies will be paid. Iraq is in discussion with the foreign oil companies to link the fees the foreigners receive for producing oil to prices so that the burden of low oil prices would be shared.

Libya: Although the battle against the Islamic State in Sirte seems to be drawing to a close, there has been little progress in settling the squabbles over reopening the ports and oil fields, and resuming production. For now, there seems to be little expectation that oil exports will be increased in the foreseeable future.

Saudi Arabia: The Saudis who have been playing coy of late over the possibility of a production freeze seemed to back down last week by saying that no specific plans about how a production freeze would be implemented had yet been discussed.  The Saudis produced a record 10.67 million b/d in July and indications are that the August production will be about the same or possibly higher. Saudi exports have remained fairly steady at about 7.5 million b/d in the last two years, with the extra production going to domestic refineries and into electric power plants. In recent years, the Saudis have been making an effort to increase the use of natural gas to fuel the increased demand for summer cooling. This program may be having an effect as the direct burn of crude was only 700,000 b/d this past June as compared with 894,000 b/d last year.

Last week, the Houthis retaliated for months of bombing by the Saudi Air Force by firing missiles at a Saudi Aramco oil facility in southwestern Saudi Arabia. The Saudis say the damage was minimal and the facilities are functioning normally. The UN says that Saudi air strikes are responsible for most of the 3,800 civilian deaths that have been registered in the civil war.  Washington is coming under increasing heat for its role in helping with the Saudi air war against the Houthi.

3.  China

Beijing’s oil production peaked last year at around 4.3 million b/d. This year the low cost of importing foreign crude as compared to maintaining its higher cost domestic production led the Chinese to cut back production. In July, China’s domestic oil production was down to 3.95 million b/d, the lowest in five years. This development will likely have an impact on the global oil market in the long run. If the trend continues, China will likely be importing increasing amounts of oil even with markedly reduced economic growth rates.

Low oil prices, sluggish demand, and less domestic production are causing havoc with the profitability of Chinese oil companies. PetroChina and Cnooc reported sharply reduced earnings last week with PetroChina down by 98 percent in the first half as compared to last year. At Cnooc, things were worse with the company reporting a 7.7 billion yuan loss in the first half as compared to a 15-billion-yuan profit last year. Cnooc took a major hit with investment of $15 billion in Canadian tar sands producer Nexen a few year ago. The facility has been closed since mid-July with no plan to reopen anytime soon.

Chinese refiners continue to dump about 370,000 b/d of excess diesel on the Asian markets — some 182 percent higher than exports at this time last year.

4. Nigeria

There is growing pessimism that the disputes between the federal government and the insurgent groups that have been blowing up pipelines will not be settled soon.  The oil companies are keeping a low profile and are not announcing repairs to pipelines for fear of drawing yet more attacks. The government is trying to find someone to negotiate with, but this time, the insurgency is not as unified as it was in the days of the Movement for the Emancipation of the Nile Delta (MEND) which agreed to a ceasefire in return for protection money seven years ago.

In addition to the Niger Delta Avengers, that is the largest and most active of the groups conducting the attacks, there seem to be at least five other groups that together have carried out over half of the 16 major attacks that have taken place in the last three months.  It is these groups that are refusing to participate in the ceasefire talks. For now, it is unclear as to just what is happening and how long it will be before the 700,000 b/d of oil production can be restored.

5. Venezuela

The country continues to deteriorate. There is little food and little medicine, and imports are at a record low, crime is at an all-time high, and the government continues to toss opposition leaders in jail.  Those who can get out are fleeing the country. The newest problem is that the national oil company, PDVSA, can no longer afford to import the lighter crudes and naphtha needed to dilute Venezuela’s heavy crudes so they can be exported.  Some foreign oil companies are settling for swap deals in which they receive heavy crude in return for light crude upon delivery. Few foreign companies will extend the country any credit and insist upon full payment before anything is shipped.

A recent multi-billion-dollar tender to drill 600 new wells was awarded to a Colombian trucking firm which had never drilled an oil well. The company’s management was close to President Maduro. The tender was canceled after the foreign oil companies still operating in Venezuela rebelled and refused to be involved with an obviously unqualified contractor. The contract has now been split into six pieces and is up for rebidding. PDVSA, however, wants bidders to finance their projects.

So far there is no indication that there is anything in Venezuela’s future but more misery for its people and declining oil production. Most analysts believe that even a substantial oil price rebound will not help the situation.

6.  The Briefs

Drilled into debt: BP, Shell, Exxon and Chevron are saddled with their highest debt levels ever as they struggle with low crude prices, raising worries about their ability to pay dividends and find new barrels. Just a decade ago, these four companies were hauled before Congress to explain “windfall profits” but now can’t cover expenses with normal cash flow. (8/25)

Offshore market: There are signs of stability in offshore exploration and production, but it may be next year before any real indications surface, a London-managed driller said. Seadrill Ltd., a deep-water driller with offices in London, reported a $260 million decline in net profits for the second quarter and a 24 percent decline in revenue to $868 million year-on-year. (8/27)

In Norway, western Europe’s biggest oil and gas producer, companies are cutting investment forecasts further for this year and next as they continue to weather a two-year long collapse in crude prices. (8/24)

In the UK, production of oil rose by 17.3 percent compared to the first quarter of 2015, due to new fields coming online, but also due to reduced production in February 2015, while production of natural gas rose by 6.0 percent. (8/26)

OPEC’s net revenues from oil revenues declined by 46% to $404 billion during 2015 compared to 2014, according to the US EIA. (8/27)

Turkey, Russia, Iran: A new strategic axis is forming in the Middle East, and this axis could play a transformative role in the region, upsetting the longstanding balance of power. Ankara has apologized to Moscow for the shooting down of a fighter plane last year. Iran and Russia have both condemned the July coup attempt in Turkey. The three countries are now negotiating a joint involvement in Syria. (8/23)

Saudi Arabia kept its spot as China’s biggest oil supplier for the first seven months this year after pumping record output in July, even as Russia threatens to overtake the kingdom in their contest for sales to the world’s largest energy consumer. The Saudi’s shipped an average of 1.05 million barrels a day to China in the year through July 31, giving it a market share of 14 percent. Russia’s share was 13.6 percent. (8/25)

With Egypt, the International Monetary Fund reached a “tentative” agreement regarding a $12 billion loan that would pay out over the next three years. One problem that needs an urgent fix to assure the IMF loan is the country’s fuel subsidies. Egyptians will pay 65 percent of the actual cost of fuel at pumps during the 2016-17 fiscal year, and by the time the IMF distributes the last portions of its massive loan in 2020, the fuel subsidies will be completely dismantled. (8/26)

In Kenya, Tullow Oil will drill eight additional exploration wells in the African nation’s North Lokichar region. Exports will be being transported by road to the Indian Ocean port city of Mombasa. Kenya’s recoverable resources are estimated at 750 million barrels. Tullow will sink more wells to increase that figure to over a billion barrels. (8/25)

Offshore Senegal, Australian energy company FAR says its reserve estimate for an oil field keeps increasing. Third party assessment of the reserve potential conducted after the drilling of two additional appraisal wells suggests a best-case estimate of 641 million barrels of oil. (8/24)

In Colombia, analysts and industry sources are skeptical that the peace agreement announced this week between the government and a rebel group with which it has been at war for a half century will provide any short-term boost to the fortunes of Colombia’s beleaguered oil industry. Continued violence, logistical difficulties and an expected tax increase later this year on top of an already high government take will continue to make Colombia’s oil patch a challenging place to find, produce and transport oil and gas. (8/27)

Canada may ask oil companies to contribute to the hundreds of millions of dollars or more the country has to pay to an international body if they drill far offshore, according to an internal government memo. If that happens, it could make the operations more expensive and strain talks that companies will have with provincial governments, which already require them to pay royalties. (8/25)

Canada is evaluating Petronas’ final submission for the C$36 billion ($28 billion) Pacific NorthWest LNG project before deciding if the company can proceed with its plan to ship gas from the country’s Pacific Coast. Construction was originally scheduled to start in 2015, but the approval has been mired over concerns about the impact on fish, wildlife and the traditional ways of life of First Nation tribes in the region. (8/22)

The US oil rig count remained unchanged at 406 for the week, ending eight straight weeks of gains, according to Baker Hughes Inc.  Meanwhile, Canada saw an increase of 25 oil and gas rigs this week, with a total of 146 sites now in operation. (8/27)

US gasoline consumption is forecast to increase by 130,000 b/d (1.5 percent) to 9.29 million b/d in 2016, which would make it the highest annual average gasoline consumption on record, beating the previous record set in 2007 by 0.1 percent. (8/23)

Eagle Ford play: According to EIA’s latest available data, as of 2014 Eagle Ford had 5.172 billion barrels of proved tight oil reserves, up from 4.177 billion for 2013. While production in the Eagle Ford play has dropped for months, it has untapped reserves that will still be there well after oil prices return above US$50-60. The Bureau of Economic Geology at the University of Texas has estimated that Eagle Ford’s oil reserves could be 6.5 billion barrels at crude at US$40, with 32,000 wells. At US$50, reserves jump to 8.2 billion barrels, and US$100 crude would mean 11.3 billion barrels of reserves and 93,000 wells. (8/25)

In West Texas a surprising land grab has energized an otherwise dormant market and sent some explorers’ shares soaring. Blackstone Group said Thursday that it has agreed to invest $1.5 billion in a pair of drilling deals there. (8/27)

Multibillion-dollar oil and gas deals are back on the table. More than $11 billion of transactions were announced globally in July as crude’s recovery fueled hopes of a steadier market, Wood Mackenzie Ltd. said. That’s the highest monthly total this year and brings the amount since May to $32 billion, triple that of the previous three months. Deal making will continue to accelerate as oil prices stabilize. (8/26)

In the US Gulf of Mexico, bidding that emerged in the latest lease shows only three companies emerged with bids totaling $18 million and they took up only a fraction of the 23.8 million acres on the auction block. (8/25)

Alaska LNG Project: Cost estimates have been shaved 20 percent or more, but the project is still not economic, its managers told state legislators in hearings that ended late Thursday. Based on that, three North Slope producers who are now part of Alaska LNG — BP, ConocoPhillips and ExxonMobil — will not proceed further with the project as it is currently structured. (8/27)

Fraud at Exxon? The investigation by a handful of attorneys general into ExxonMobil has more to do with the oil major misleading investors than it does about covering up climate science. As The New York Times recently noted, New York attorney general Eric Schneiderman emphasizes that the probe is focused on securities fraud, which hinges on recent statements that Exxon has given to shareholders and securities regulators. (8/23)

Sanchez Energy Corp. is seeking buyers for some of its acreage in the Eagle Ford Shale region in south Texas, as the explorer looks to raise cash for developing its best prospects. The Houston-based company is soliciting offers for about 25,000 net acres on three patches of land within the basin. The assets are expected to fetch less than $500 million. (8/25)

Key Energy Services, under a prepackaged reorganization plan, has filed for Chapter 11 bankruptcy – the latest oilfield services company to succumb to the ravages of the oil price downturn. The reorganization isn’t expected to impact the company’s 3,800 workers in the United States, who, along with vendors and trade creditors, will be paid in full in the ordinary course of business. (8/26)

Environmental and tribal groups protesting an oil pipeline from North Dakota said in a letter to the White House it poses a threat to their existence. Tribal groups are suing federal regulators over permits for the 1,134-mile pipeline because of threats to the Missouri River and other regional water ways. (8/27)

Challenging seismic: The advocacy group Oceana called on the U.S. government to enact further restrictions on Atlantic Ocean energy work, citing seismic threats to marine animals. (8/25)

California is looking at capping the amount of natural gas burned by power plants this winter, exploring the potential for liquefied gas imports and monitoring oil refiners’ use of the fuel as a historic leak last year continues to threaten the state with supply shortages. The state needs to take such measures immediately to help avoid service disruptions during the winter heating season. (8/23)

America’s first offshore wind farm will begin pumping power into the New England electric grid this October. By global standards, the Block Island Wind Farm is a tiny project, just five turbines capable of powering about 17,000 homes. Yet many people are hoping its completion, with the final blade bolted into place at the end of last week, will mark the start of a new American industry. (8/23)

The US economy grew at a slightly slower rate (1.1%) than initially forecast (1.2%) in the second quarter, underscoring a weak performance in the first half of 2016, the Department of Commerce said. (8/27)

Alaska’s gross domestic product has been falling since 2012, and it’s been hemorrhaging jobs i n mining and logging, the largest single sector of its economy, amid a years-long oil price slump. Today, it has the highest unemployment rate of any state, at 6.7 percent. (8/25)

Speed limit: The US Department of Transportation’s National Highway Traffic Safety Administration and Federal Motor Carrier Safety Administration are proposing equipping heavy-duty vehicles (26,000 lbs. and up, gross vehicle weight rating) with devices that limit their speeds on US roadways, and requiring those devices be set to a maximum speed, a safety measure that could save lives and more than $1 billion in fuel costs each year. (8/27)

Energy efficiency: Increasing the application of three major policies–appliance and equipment efficiency standards, utility energy efficiency targets of 1.5% per year, and building energy codes—could make efficiency our nation’s largest electricity resource by 2030, providing one-third of total expected electricity generation needs. These additional energy savings would avoid the need for electrical capacity equivalent to 487 power plants. (8/23)

Energy Secretary Ernest Moniz said at a hearing in Seattle that fracking has helped bring down CO2 emissions to their lowest in 24 years by enabling the displacement of coal with lower-emission natural gas. (8/26)

California will extend its landmark climate change legislation to 2030, a move that climate specialists say solidifies the state’s role as a leader in the effort to curb heat-trapping emissions. Lawmakers have passed, and Gov. Jerry Brown has promised to sign, bills requiring the state to reduce its greenhouse gas emissions to 40 percent below 1990 levels. The ambitious plan targets both power plants and vehicle emissions. (8/26)

In China, more than 2,000 officials from Party and government departments have been punished for malpractice related to environmental policy implementation. (8/22)

Electric car maker Tesla Motors will launch a 100 kilowatt hour battery for its Model S and Model X cars, Chief Executive Elon Musk said on Tuesday. The new battery adds acceleration capacity and also extends the driving range of the vehicles, taking the performance version of the new Model S beyond 300 miles (482.8 km), Tesla said. (8/24)

New Zealand said it formed a special counsel tasked with doubling the deployment of electric vehicles on the road by 2021. (8/25)

Methane hydrates: Large-scale production of gas from methane hydrates remains a distant prospect, but should it turn into reality, it would have major implications. Japan continues to refine the technology in hopes of making a breakthrough sufficient to bring that new source of gas to market (8/25)

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