Quote of the Week
“I am now more convinced than ever that 2015 will see the peak in world crude oil production. I have very closely studied the charts of every producing nation and my prognosis is based on that study. I see many nations in steep decline and most every other nation peaking now, or in the last couple of years, or very near their peak today. These include the world’s three largest producers, Russia, Saudi Arabia and the USA.”
–Ron Patterson, peakoilbarrel.com
1. Oil and the Global Economy
2. The Middle East & North Africa
6. The Briefs
1. Oil and the Global Economy
Crude oil prices were little changed last week, with New York futures trading around $60 a barrel and in London around $63. As has been the case for several weeks, the global oversupply of crude, the Greek debt crisis, and China’s weak economy have kept downward pressure on the markets. Trader hopes that the summer driving season will soon push up the demand for gasoline and expectations of an economic rebound continue to support oil prices. The uncertainties of the Iranian nuclear negotiations cut both ways with an agreement likely leading to a large increase in available crude, while failure of the talks would lead to increased tensions or worse in the Middle East.
While US commercial crude stocks ostensibly fell by 4.9 million barrels last week, in reality little happened. Some 300,000 barrels were transferred into the strategic reserve; bad weather led to a 2.1 million barrel drop in crude imports; and gasoline and distillate stocks grew by 2.5 million barrels as crude was refined into oil products faster than these stocks were consumed or exported. Traders quickly figured out that there had been little change in the inventory. Despite the large drop in the rig count, most analysts seem to think that the US oil production is still relatively flat or declining only slightly. Much of the data, however, is two months old so it will be a while before we get a good fix on what sort of change is taking place in US production.
Unless there is some dramatic change in the Greek or Iranian situations, traders do not expect prices to move very much in the near future. Some are worried as to whether the official estimates of a 2 million b/d excess of supply over demand is much too high. These analysts believe that there are “missing barrels” and that while an oversupply situation exists, it is not nearly as bad as the major forecasters are portraying. While the fall in the US rig count continued last week, it seems to be bottoming out. Some shale oil drillers are even talking about adding more rigs if US oil prices stabilize in the $60s.
2. The Middle East & North Africa
Iraq/Syria: There was heavy fighting in Syria last week as ISIL forces went on the offensive to spread terror in the Kurdish town of Kobani near the border with Turkey. Some 60 ISIL insurgents were killed and the rest driven out of the town after randomly killing some 200 Kurdish civilians who had returned to live in the city. The attack was intended as a warning to the Kurds, who had been having some success lately, that ISIL could still strike anywhere it pleases despite the help the Kurds are receiving from US airpower. The US reported that it conducted 14 airstrikes on ISIL targets related to the fighting.
There was little news from Iraq last week. The usual ISIL bombs went off in Baghdad killing about 12. Iraq’s prime minister said that the government’s retreat from Ramadi last month was not authorized and the commander in charge essentially gave the city to ISIL for no good military reason. There is a report that the revenue sharing agreement between Baghdad and Erbil may be breaking down as Kurds believe they are not being paid their fair share of Baghdad’s oil revenue.
Iran announced that its gas exports into Iraq to help generate electricity have been delayed due to security concerns about the pipeline. The pipeline, which crosses 120 km of Iraqi territory, is to supply the power station at Diylala, then branch to supply two additional power stations in Baghdad.
Iran: The Tuesday deadline for a preliminary agreement seems to be slipping as the Iranian delegation returned to Tehran on Sunday for further consultations. Western diplomats are saying that Tehran seems to be backtracking on issues thought to be settled months ago. These key issues are just how intrusive verification inspections will be and how quickly the sanctions will be lifted after an agreement is signed. In a speech last week, Iran’s Supreme Leader, the Ayatollah Khamenei, ruled out inspections of military facilities and demanded that the sanctions be lifted immediately. These positions are, of course, unacceptable to the West. Unless Iran’s positions turn out to be posturing, it is beginning to look as if an agreement may not be possible at this time.
In recent weeks, Tehran has expressed ambitions of increasing its production to 4 million b/d of crude plus 1 b/d of condensate by 2018. A new study concludes that Western oil companies would be reluctant to make the investments needed to increase Iran’s output by this much and Tehran does not have the resources to invest. Considering Iran’s deep involvement in so many of the region’s civil wars there is considerable risk in long term investing in the country. Violation of any agreement on Iran’s part could result in re-imposition of the sanctions causing all sorts of problems for foreign firms attempting to expand Iran’s oil production.
Saudi Arabia/Yemen: After three months of bombing and the failure of the peace talks, it is clear that the Saudis have no coherent plan to end the conflict. For now Riyadh will continue the bombing and wait to see what happens. As the Houthis advanced deeper into Sunni majority southern Yemen, it has been facing stiffer resistance from Saudi-supported local militias.
Over the weekend, the Houthis fired missiles at the oil refinery in Aden starting a large fire. In April the refinery, which was processing some 150,000 b/d, closed down due to the fighting and declared force majeure on its export contracts. The gasoline and diesel to run the country’s vital water pumps and to bake its bread will soon be entirely gone. This situation could easily turn into one of the biggest humanitarian crises we have going.
The government cut interest rates and reserve requirements again last week in an effort to revive an economy that is headed toward its worst performance in the last 25 years. China’s economy continues to be hampered by a downturn in its real estate market, factory over-capacity, and excessive debt. Undoubtedly efforts to control emissions, which have been ignored for decades, are adding to the problems. Until recently, China’s stock market had been booming with prices doubling in 12 months, however, In the last two weeks the markets have reversed and fallen some 10-30 percent. Much of the rapid price increase was fueled with borrowed money raising the specter of a major market crash. Some believe that the interest rate cuts are an effort to prevent further deterioration of the financial markets.
Beijing continues to work on its pollution problems. A new draft law brought forward last week requires that ships on inland waterways must use approved diesel fuel to cut admissions. Ocean-going ships using Chinese ports will be required to use approved fuels after stopping at ports. They will also be required to use shore power after docking.
It sounds like we are back in the cold war with President Putin saying that he will spend $400 billion in the next five years strengthening his armed forces “to fend off military threats to his borders.” As Putin’s popularity is currently at an all-time high, he can still get away with such expenditures despite the drop in oil prices and the perilous state of Russia’s economy. Last week the EU extended its sanctions on Moscow until the end of January. As there is little that Putin can do economically to retaliate for the sanctions, all that he has left is to build up his military forces and bluster.
Another major Russian/rebel offensive into Ukraine is expected with NATO and Ukrainian officials warning that it will come soon. Some believe such an offensive would be aimed at opening a land bridge into Crimea, which has already been annexed by Russia. Such a corridor would greatly aid Russia in attempting to keep its newly acquired territory supplied from Russia. So far the West has responded to this situation with non-lethal military and economic aid.
In the meantime, Russia’s economy contracted more than expected in May with its GDP contracting 4.9 percent from April 2014. This was a large drop from the 4.2 percent decline registered in May. Rosneft, Russia’s largest oil producer reported that its first-quarter profit was down 35 percent as compared with 2014. A combination of low oil prices and the sanctions, which are curbing the firm’s access to debt and equipment are given as the cause for the drop in profitability.
On Saturday, EU finance ministers refused to give Athens an extension to its bailout program. The move came after Prime Minister Tsipras announced that Greece would hold a national referendum to vote on whether to undertake the austerity programs demanded by the rest of the EU. The EU finance ministers looked on the referendum as a way to undercut the ongoing negotiations and were angered by the move. On Sunday the European Central Bank announced that it would no longer extend emergency loans to Greece, and Athens announced that Greece’s banks will not open on Monday and will remain closed for at least a week.
The weekend’s developments have led to much speculation as to how bad the crisis will eventually become. For now all we can say is that the collapse of the Greek economy will not be good for the EU and the value of the euro. Unless there is some positive development soon the crisis seems destined to lead to lower valuation for the euro and downward pressure on oil prices and less demand for oil from the EU.
6. The Briefs
In Norway, oil and natural gas production increased last month, with oil output up 2.4 percent year-on-year. The Norwegian Petroleum Directorate, the nation’s energy regulator, said oil production in May was 1.51 million b/d, which is 2.4 percent above May 2014 [though down over 50 percent since the 2001 peak]. Data published by Statistics Norway show investment in the nation’s oil and gas sector is set to level out after a banner start to the decade. (6/25)
In the U.K., the Lancashire County Council voted against allowing privately held Caudrilla Resources Ltd. to use horizontal drilling and fracking at the company’s Roseacre Wood site in northwest England over worries about the increase in traffic. (6/26)
Scotland’s government said Thursday that even though the oil industry is in a downturn, it expected production from the North Sea to increase by as much as 17 percent by 2019. (6/26)
In Scotland, hydraulic fracturing could give the Edinburgh government some autonomy over the energy sector with few environmental impacts, a policy paper read. (6/23)
In the Netherlands, production at the Groningen gas field will be slashed. The move is the latest in a series of production cutbacks by the Dutch government in recent years after a study by The Royal Netherlands Meteorological Institute linked gas extraction to a rise in earthquakes in the northern province of Groningen, where the field is located. The tremors have damaged many homes in the area. (6/24)
Russia surpassed Saudi Arabia to become China’s top crude supplier as the fight for market share in the world’s second-largest oil consumer intensifies. (6/24)
Russian crude: Refiners on the U.S. West Coast and Hawaii have stepped up purchases of Russian crude, taking advantage of a narrow gap between US and global prices as they look to guard against a seasonal shortage of Alaskan supply. (6/24)
Russia’s Energy Minister Alexander Novak said on Thursday that Arctic offshore drilling planned for this year will be postponed until 2016 or later. (6/22)
Arctic drilling setback: An oil industry consortium including Exxon Mobil and BP suspended its Canadian arctic exploration program in the Beaufort Sea, citing insufficient time to begin test drilling before its lease expires in 2020. The move represents a setback for oil companies active in Canada’s arctic waters and follows a similar decision by Chevron in December to halt its own exploratory drilling program in the Beaufort Sea. (6/27)
The Israeli government has declared development of natural gas to be an issue of national security in a move aimed at easing an antitrust logjam in place since last December. (6/27)
Nigeria’s new president, Muhammadu Buhari, on Friday dissolved the board of the state oil company from which billions of dollars is reported to be missing. Buhari took office last month promising to halt corruption, and he said this week that Western governments had promised to help recover looted state money. (6/27)
Nigeria will probably be hit by fuel shortages in three weeks, as the government doesn’t have enough money to pay for gasoline subsidies, Nigeria almost ground to a halt last month during the country’s worst fuel shortage in a decade due to a dispute between oil-product marketers and the outgoing government. (6/26)
A resource curse, or a “paradox of plenty,” can occur when the extraction of natural resources like fossil fuels and minerals in resource-rich countries contributes to slower economic growth than countries that are less abundant in these same natural resources. East African nations such as Mozambique, Uganda, Tanzania, and Kenya are currently experiencing potentially “resource curse” booms in oil and natural gas production. (6/26)
Venezuela’s national crime pandemic – the United Nations says the country has the world’s second-highest murder rate – is a growing headache for the oil industry, which accounts for nearly all of the country’s export revenues. Hold-ups and thefts in the sector are on the rise. (6/26)
Pemex is in talks with Mexico’s powerful oil workers union to lower labor costs via a pension overhaul and more flexible work rules to secure its future in a newly competitive environment. Success in renegotiating the collective bargaining agreement at Mexico’s biggest company could determine how well Pemex performs now that oil prices are low and the former energy monopoly faces private-sector competition for the first time. (6/26)
International shale oil and gas: As recently as year-end 2014, only four countries in the world were producing commercial volumes of either natural gas from shale formations (shale gas) or crude oil from tight formations (tight oil): the US and Canada, and “start-ups” Argentina (275 wells drilled) and China (200 wells drilled). Other countries have started exploring hydrocarbons from shale and other tight resources, especially Mexico, but they are still short of reaching commercial production. (6/27)
Canada’s transport authority said it filed legal charges in connection with the Lac-Megantic oil-train disaster in 2013 under two federal acts. The derailment caused over 40 deaths. (6/24)
Pipeline problem X4: TransCanada Corp.’s proposed $9.7 billion pipeline (Energy East) that would traverse Quebec on its way to connect Alberta oil-sands fields with the Atlantic Coast is encountering pushback. This marks the fourth time this decade that an oil-sands pipeline has been mired in environmental opposition. Keystone XL remains bogged down in US politics for a seventh year. Protests and lawsuits are hobbling two lines that would carry crude to the Pacific Coast. (6/26)
In Canada, an industry group in the oil sands sector said it was committed to playing a greater role in the effort to reduce greenhouse gas emissions. The Canadian Association of Petroleum Producers said that, since 1990, the sector has spent more than $1 billion on technologies needed to produce oil with a lower environmental footprint. (6/27) [Note: hypocrisy alert]
Oil sands: A new peer-reviewed study funded by the US Department of Energy says Canada’s oil sands greenhouse gas emissions are an average of 20 percent higher than from US conventional crude, adding ammunition to opponents of the Keystone XL pipeline and other critics of surging Canadian crude production. (6/24)
The U.S. oilrig count fell by three to 628 in the latest week, according to Baker Hughes, marking the 29th straight week of declines. Gas-directed rigs increased by 5 to 228. (6/27)
Hedging: Two big trades in oil options worth nearly $60 million last week boosted volatility in that market and revived speculation among traders that U.S. producers are placing hedges to guard against another price rout this fall. (6/26)
Well permits: Analysts at Raymond James & Associates Inc. noted in an energy update this week that 1,030 new well permits were issued last week, representing the highest total since the first week of February. During the previous 18 weeks, the average number of permits issued each week was just 852. Utilizing a 4-week average, permits issued rose by 53 compared with the prior week. (6/27)
The drilling rig count in North Dakota’s oil patch appears to have hit a bottom. For the past three weeks the count has hovered between 76 and 79, after sliding only slightly from 80 at the end of May. This has been the longest period since oil prices started to slide last fall that the rig count has stayed in the same range, offering many in and near the No. 2 U.S. crude-producing state’s energy industry a bit of solace that a nadir has been reached. In early March, though, the count was at still 113. (6/24)
WPX Energy, a small oil producer in North Dakota, said on Thursday it will add two rigs this year, becoming the first since the crude price downturn to announce concrete steps to boost output. WPX has effectively staked out a leadership position in the state’s Bakken shale formation by saying it will add rigs, slash well completion costs and target a 20 percent boost in output by 2016. (6/26)
The Wolfcamp Delaware basin, a shale play straddling the Texas border with New Mexico, could be the next big deal. IHS finds that Wolfcamp Delaware has the potential to support steady production even during the weak crude oil market. Compared with other shale basins, this one has some of the best normalized production rates in the country. A 2013 report by Forbes notes, however, that Wolfcamp Delaware may hold several times more oil in potential reserves than either the Bakken shale in North Dakota or Eagle Ford. (6/25)
Refining: The United States’ capacity to refine crude oil into petroleum products increased by 0.2% in 2014, reaching 18.0 million barrels per day. (6/26)
Pipeline problems: Opposition to natural gas projects has moved from exploration and production to transportation, speakers said during a discussion on Capitol Hill of US gas infrastructure needs. (6/26)
A spike in earthquakes across Oklahoma is forcing the state’s energy regulator to urgently consider tougher restrictions on drilling activity, calling it a “game changer.” (6/25)
Oil spill impacts: The shutdown of a pipeline that spilled 100,000 gallons of crude oil on the Santa Barbara coast forced Exxon Mobil to halt drilling at three offshore platforms. The company temporarily ceased operations last week after their storage facilities reached capacity and the county rejected its emergency application to truck oil to refineries. (6/25)
BLM and fracking regs: A federal district judge in Wyoming delayed until at least early August the US Bureau of Land Management’s implementation of its recently issued hydraulic fracturing regulations. (6/25)
In Asia Pacific, oil production peaked in 2010 at 8.4 million b/d while consumption continued to increase to 30.9 million b/d. The difference between consumption and production (net imports) is now 73% of consumption, up from 68% ten years ago. (6/24)
Renewables: After years of lofty promises, Wall Street believes the renewable energy industry can produce a payoff. In just a few years, investors have gone from zero to billions in the amount of money they’re pumping into renewable-energy companies and environmentally friendly projects. Many see the sector as past a tipping point: Skepticism has melted among the financial brokers of the energy world, and they have started to fund the renewable-power sector as a legitimate upcoming rival to fossil fuels. (6/26)
The Scottish government said it wants the British energy secretary to come to its capital to explain the reasons behind a cut in wind energy subsidies. London announced plans to end public subsidies for new onshore wind farms starting in April 2016. Last year, the $1.2 billion in government support helped onshore wind power generate 5 percent of total British electricity and bring the region closer to its climate change goals. (6/25)
Japan’s battery storage: Japanese companies are building some of the world’s biggest battery systems to address one of solar power’s biggest problems–its volatility. Handling the surges in power when the sun shines and storing that energy for use when it is cloudy or dark is a major headache for solar power producers. Two companies are assembling a 50,000-kilowatt battery system for Kyushu Electric Power to study ways to better accommodate solar power. (6/26)
Germany’s nuclear phase-out plan is entering its final stage with the first of the country’s nine remaining modern reactors shutting down for good this Saturday. Last year, E.ON decided to retire the 1.3 GW 33-year-old reactor in the southern state of Bavaria earlier than required because the plant was not profitable to run. (6/26)
Indonesia: The coal market’s best hope of breaking a four-year losing streak may be its biggest supplier’s plan to burn more at home. Indonesia plans to expand generating capacity by 46 percent in four years with new power plants, half of them burning coal. (6/26)
In Alberta, the recently elected government said Thursday it will double a carbon tax on industrial emissions of greenhouse gases by 2017, calling it a first step in toughening this province’s environmental policies. The left-leaning government said the policy is part of a broader review of environmental policies that will result in additional measures to reduce greenhouse-gas emissions in time for a year-end UN climate-change conference in Paris. (6/26)
Climate change: More people will be exposed to floods, droughts, heat waves and other extreme weather associated with climate change over the next century than previously thought, according to a new report in the British medical journal The Lancet. (6/23)
H2: Researchers at Stanford University have developed a new low-voltage, single-catalyst water splitter that continuously generates hydrogen and oxygen. An open access paper describing the synthesis and functionality of the bi-functional non-noble metal oxide nanoparticle electro-catalysts appears in the journal Nature Communications. (6/24)