Quote of the Week
“We will be dominant. We will export American energy all over the world, all around the globe. These energy exports will create countless jobs for our people, and provide true energy security to our friends, partners, and allies across the globe.”
U.S. President Donald Trump, in a speech [Ed. Note: possible hyperbole?]
Graphic of the Week
1. Oil and the Global Economy
2. The Middle East & North Africa
7. The Briefs
1. Oil and the Global Economy
After a decline of nearly $10 a barrel since mid-May, oil prices rebounded sharply last week with New York futures climbing from below $43 to close at $46 a barrel. Although many are still worried about excess oil inventories, most traders are optimistic that the worst is over and that higher oil prices stemming from the OPEC production cut are ahead. Many see the recent surge in US shale oil production slowing due to oil prices being in the $40s.
While last week’s US stocks report showed a small increase in the total US crude inventory, traders focused on a 900,000 barrel drop in US gasoline inventories and what the EIA says was a 100,000 b/d drop in US oil production the week before last. Analysts say that a major storm in the Gulf that week and lower production in Alaska due to maintenance were likely to be the cause of any decline in US oil production.
With US oil prices still in the mid-$40s, there are still questions as the how long the US shale oil industry can continue to grow with oil selling for less than the cost for many drillers. Last week the US oil-rig count dropped for the first time since January, even if it was only by two units. Optimists concede that oil prices need to be above $50 a barrel for all but the most efficient shale oil operators or large companies that have other more profitable sources of revenue
Last week the Trump administration announced that the US will soon be energy “dominant.” As a major exporter of oil and gas, the US will no longer be dependent on unstable foreign sources of oil. As many observers note it is hard for a country that imports 8 million barrels of crude a day to be energy dominant, however, in addition to ignoring facts, the administration has an answer for its optimistic outlook. Lifting numerous federal regulations on drilling is sure to increase US oil production significantly thereby reducing the need for imported oil. Then it seems that Canadian and Mexican oil imports do not count as “foreign” imports since these countries are close friends and would never think of blackmailing the US during an international crisis.
Finally, we have US LNG exports which the administration expects to grow indefinitely making the US a major power in the world energy markets. The downside to this scenario is that US natural gas production has been falling year over year for the last 14 months due to low prices and a gas glut in the northeast. All the major shale gas plays are in decline and the demand for LNG exports and electric power generation will force prices higher and eat away at inventories. Many analysts believe that the notion of the US shale gas industry will become a major supplier of world LNG markets is highly unlikely. US conventional gas production has been dropping steadily for some time and major shale/oil gas fields are likely to be reaching peak production soon.
Discussion of whether “peak demand” is real or not continues. This phenomenon which many expect in the next ten years could occur from limitations on fossil fuel combustion due to climate change or a widespread switch to electric powered cars and trucks that will come from lower cost electrical energy storage devices. The oil industry generally denies that the demand for oil will slacken anytime in the foreseeable future.
Other organizations, however, continue to worry about what will happen if the demand for oil drops. Last week a new report from the Carbon Tracker Initiative looked at the possibility of lower demand and concluded that about one-third of the global oil industry’s potential spending or about $2.3 trillion would be wasted on “stranded assets.” The problem is particularly acute for oil projects such as tar sands and deep water platforms that can produce for decades. Shale oil wells which deplete quickly are much less vulnerable to the problem of stranded assets. If the effects of global warming become more serious in the next ten years this debate is likely to become more important and affect investment decisions.
2. The Middle East & North Africa
Iran: Last week a heat wave in the Middle East sent temperatures in Ahvaz, Iran, a city of 1.1 million, to what may prove to tie the world record for an all-time high of 129.2o F (540 C). To make matters worse, the heat/humidity index reached into the 140os F. Similar high temperatures were recorded in nearby parts of Pakistan. This event serves to remind us that the Middle East is a region where increasing summer temperatures are likely to have a major impact on the nation’s ability to function. With 83 million people to feed and supply fresh water, Iran is likely to find a larger share of its resources going to fight the effects of climate change.
Agricultural specialists are already warning that the country will not have enough water in a few years to support its food production. A few years ago, a former Iranian agricultural minister warned that within 30 years the water/temperature situation would become so bad that Iran would become a “ghost town” with millions being forced to migrate elsewhere.
After years of delay, Iranian gas began trickling into Iraq’s Mansuriya power plant near the Iranian border. There are obviously serious security issues for a pipeline bringing Iranian gas into Iraq, and the two sides have not yet agreed to payments terms.
Tehran announced last week that its major oil terminal at Kharg island will increase its export capacity to 8 million b/d from the current 2-3 million. Loadings at Kharg constitute about 95 percent of Iran’s oil exports which yield about 40 percent of the country’s foreign exchange earnings.
Iraq: A new analysis of Iraq’s oil production says that it remained stable at about 4.58 million b/d between March and May. This figure, which includes production from Kurdistan as well as Iraq proper, is believed to be significantly higher than Iraq’s official production figures that are used by OPEC to set the country’s production quota.
Now with the battle of Mosel about over, the issue of Iraqi Kurdistan is back on the front burner. The Kurds have scheduled an independence vote for September 25th, which is sure to be overwhelming in favor of independence now that the country has begun to exploit its oil reserves. Such a vote is likely to set off decades more of turmoil involving Turkey, Syria, Iran and Iraq as well as the Kurds. For now, the question is how soon after the vote will the Kurds take concrete steps to separate from Iraq.
Russia’s government-controlled Rosneft is in discussions with Iraqi Kurdistan to help develop oil fields around Kirkuk which currently are under Kurdish control, but were part of Iraq proper before the ISIL uprising. This territory as been disputed for decades. Russian involvement in this issue would signal a new aggressiveness on the part of Moscow to inject itself in a major Middle Eastern dispute.
The furor over a shipload of crude from Kurdistan that was supposedly being sold to the US continues. As the tanker approached the US coast last week, Baghdad threatened to sue. The Kurds deny the shipment is going to the US. The heart of the issue is whether Washington’s loyalties are with Iraq or the Kurds. At last word, the ship may now be headed for Halifax rather than the US.
Saudi Arabia: Concerns are increasing about the long-term stability of the Saudi Kingdom and whether many of the trends we are seeing today could eventually lead to a political upset. In the last few years, the political and the economic situations have moved rapidly in the kingdom. Starting with the decline in oil prices which are forcing the kingdom to drain its large foreign reserves to an unprecedented move in the naming of the new crown prince, the core of Saudi society has been rattled.
The move to reduce Saudi economic dependence on oil exports before it is too late is leading to disruptions in a way of life that has changed little in the last 50 years. The ongoing venture in Yemen is draining away Saudi resources and the new dispute with Qatar seems to be going nowhere.
Early signs of problems inside the kingdom are starting to turn up. A 2016 austerity measure that reduced government subsidies to key segments of Saudi society was rescinded, further increasing the deficit. Last week the Saudis reported the first contraction in their GDP since 2009. The king has barred the recently deposed crown prince from leaving the country and has confined him to his palace in the coastal city of Jidda far from the center of power in Riyadh. This is a sure sign that the current king and his son fear the possibility of an intra-family coup.
For now, the Saudis seem to be holding together, but when the current king dies the succession may not be as smooth as in the past. Like Iran, Saudi Arabia is likely to be hit hard by global warming forcing it to spend an increasing share of its oil revenues on keeping cool and maintaining social stability. If political troubles occur in Saudi Arabia in the next decade, the impact on the world’s oil supply and prices could be severe.
Concerns are increasing that the upcoming Aramco IPO will not go as smoothly as the government hopes. The date for announcing the exchange on which the shares will be listed keeps slipping amid rumors of dissension between the new crown prince and his advisors.
Libya: Oil production has climbed to more than 1 million b/d for the first time in four years. In the meantime, General Haftar who commands the Libyan National Army on behalf of the Eastern government has issued an ultimatum that Libya’s politicians end their squabble before the end of the year or his Army which is turning out to be one of the strongest military forces in the country will intervene to settle the issue.
Libya’s 1 million b/d of oil production may be short-lived. In the meantime, it is playing havoc with OPEC efforts to clear the oil surplus.
A group of influential central bankers has warned that China’s economy may be headed for trouble. This is based on corporate debt rising much faster than GDP. China is showing signs of overheating just as the US and UK did before the 2007-2008 financial crisis.
A new report from S&P warns that China will have to take a radically different path of energy consumption to avoid an unaffordable oil import bill. As domestic oil production slips, China is becoming the world’s largest importer at the same it is becoming the world leader in new car sales.
China’s next-generation bullet train started service on the Beijing-Shanghai run last week. The train can reach 240 miles per hour and will run normally at 210 mph. In the last ten years, China has invested in an extensive network of high-speed rail lines. While building these lines has contributed to China’s GDP, the high price of a ticket seems to make these trains a losing proposition.
Gazprom expects to announce the details of a plan to sell China 1.3 trillion cubic feet of natural gas per year through the new Power of Siberia gas pipeline. This agreement marks a major shift in Russia increasing its natural gas sales to China at a time when Beijing is trying to cut coal consumption. This comes at a time when the EU is becoming increasingly wary of relying on Russia as its major source of energy. Recently 13 of the 28 EU nations said that they favor the EU becoming more involved in negotiating the details of the Nord Stream 2 pipeline that will bring natural gas directly to Germany from Russia under the Baltic. While Germany favors the pipeline, other nations fear that it would give the Russian government too much leverage over Europe’s energy supply.
Russia’s Rosneft wants to start supplying gas to those parts of Europe not served by the Gazprom network. Rosneft fears that shipments of US LNG may start to supplant Russian gas in the EU.
Petroleum Minister Kachikwu said last week that the country’s oil reserves would only last for another 25-39 years. The minister said that Nigeria is the only oil-producing country that cannot refine petroleum to meet its domestic needs. It is also the only oil producing nation struggling to keep its electric power grid working.
The government continues to violently suppress demonstrations while it prepares a new constitution which would eliminate the National Assembly and turn the country into a Cuban-style single party state with Maduro as the supreme leader for life. As the country descends toward civil war, the Washington Post editorializes that Washington should be doing more than simply standing by and imposing inconsequential sanctions. The OAS seems paralyzed too as the country sinks into chaos.
With refineries operating at less than 50 percent of capacity, the country is looking to import 13 million barrels of refined products or a third of annual consumption before the end of the year.
7. The Briefs
Sinking values: Oil companies have spent three years slashing spending and firing workers to protect profits, only to find their hard work blown away as prices entered another bear market. The MSCI World Energy Sector Index is heading for a second consecutive quarter of declines, mirroring the drop in crude. The 90 companies that make up the index, including giants like Exxon Mobil and Royal Dutch Shell, have together lost $115 billion in market value since the start of April. (7/1)
Norway’s Statoil said Monday it expected some economic spillovers would come from support centers for its Johan Castberg field. Statoil said it aims to invest around $135 million per year on the field. Statoil said it aims to make a final investment decision on Johan Castberg, located in the Barents Sea, by the end of the year. Hailed as one of the largest in the company’s portfolio that’s yet to be developed, the field has estimated proven reserves of between 400 million and 600 million barrels of oil. (6/27)
Offshore UK, energy opportunities in the British waters of the North Sea are bolstered by new work slated for natural gas, services company Bilfinger Salamis said Friday. The company announced it landed a contract for services to help Maersk Oil with platform installations for the Culzean natural gas field. (7/1)
In the Netherlands, the giant Groningen gas field beneath the flat, green farmland in the north of this country counted among the greatest prizes for Exxon Mobil and Royal Dutch Shell. Then the earthquakes started. The exploitation of Groningen—the biggest gas field in Europe—has been causing tremors for over two decades, rattling a bucolic province with no previous history of quakes and exposing two of the world’s biggest energy companies to a criminal probe and rising reconstruction bills. Amid a public outcry, the Dutch government has imposed increasingly strict limits that have more than halved Groningen’s gas production since 2013. (6/26)
China’s next-generation bullet train “Fuxing” debuted on the Beijing-Shanghai line on Monday. The new bullet trains, also known as electric multiple units, boast top speeds of 400 kilometers an hour and a consistent speed of 350 kilometers an hour. Beijing-Shanghai railway line is China’s busiest route, used by 50,5000 passengers daily. (6/27)
Japan’s LNG earthquake? Japan’s Fair Trade Commission just ruled that destination clauses and prohibition against resale probably violate anti-monopoly rules. That will mean Japanese firms will be free to re-sell any unused cargos on the global market meaning even more competition on the supply side, likely with a dampening effect on prices. It’s also a sign of the continued evolution of the global LNG industry and its supply chain — watch for a reaction from sellers, and for new contracts coming down the pipe over the coming months. (7/1)
For offshore Australia, a floating production facility that will be used to tap into the natural gas reserves has left the shipyard. The keel for the floating liquefied natural gas facility was laid in 2013. The vessel will allow Shell to pull natural gas from the Prelude field off the coast of Western Australia, process it into LNG and transport it on to its customers. Large for a floating facility, it’s one-quarter the size of an equivalent inland plant. (6/30)
New Zealand’s government said Tuesday it was introducing new measures aimed at increasing the number of electric vehicles on the nation’s roads. The government said the number of electric vehicles on the road was high, but more progress was needed to meet national goals. (6/29)
Ghanaian oil production will average 200,000 barrels per day in 2017, despite a two-month shutdown at one of the small African nation’s major production facilities. The Jubilee floating, production, storage, and offloading (FPSO) facility will go offline in September and October for repairs on a damaged turret. (6/30)
Mexican imports: In dollar terms, since mid-2015 Mexico has been a net importer of hydrocarbons (oil, natural gas, petroleum products and petrochemicals combined). To date, it has been a relatively small and fairly constant amount, but with oil production declining, and oil prices apparently continuing to fall while natural gas prices may be on the rise, the net cost could now start to increase. (6/29)
Canada might have seen producers slash capital spending during the three-year-old oil decline, but earlier investments in the country are set to keep pushing output higher for at least the next 18 months. A forecast released this month by the Canadian Association of Petroleum Producers sees the country’s output increasing by 270,000 barrels a day in 2017 and another 320,000 b/d next year. (6/30)
Rig count reversal: U.S. oil drillers cut rigs by two this week, bringing the oil rig count down to 756, still more than double the 341 oil rigs last year at this time, according to Baker Hughes Inc. This was the first dip after 23 straight weeks of increases, plus increases in 52 of the last 57 weeks. Gas rigs increased by one to 184. Combined, the total oil and gas rig count in the US now stands at 940 rigs. (7/1)
President Trump has approved the construction of a new petroleum pipeline from the U.S. to Mexico. The Burgos Pipeline would have the capacity to transport 108,000 b/day of refined petroleum products and will cross the border near Penitas, TX. (7/1)
US exports: Late last month, an oil tanker that measures three football fields long and six stories high moved slowly through the port of Corpus Christi, Texas, to test the waters of America’s booming crude-export industry. Its arrival in the humid air of South Texas marked the first time a tanker of that size had called on a US terminal in the Gulf of Mexico. The objective: determine if some of the world’s biggest carriers could start ferrying oil from Texas to foreign buyers. (6/27)
BP doubles down: Seven years after its Deepwater Horizon explosion and spill, which cost it $61 billion, BP is betting tens of billions of dollars on the prospect that it can slash the costs of offshore drilling by half or more, just as shale oil producers are doing onshore. BP says its next Gulf investment, Mad Dog Phase 2, should be profitable at $40 prices. As recently as 2013, BP said it could not start new deepwater investments in the GOM at prices below $100 per barrel. (6/27)
Keystone XL is facing a new challenge: The oil producers and refiners the pipeline was originally meant to serve aren’t interested in it anymore. The pipeline’s operator, TransCanada Corp., is struggling to line up customers to ship crude from Canada to the U.S. Gulf Coast. (6/30)
Pipeline problem: The crude used to produce gasoline on the East Coast typically arrives by tanker from West Africa. That’s because the region’s five plants have no pipeline access to U.S. shale fields or Canada’s oil sands. Resistance to building new pipelines in densely populated areas has led to battles for control of existing pipelines. (6/27)
The oil price crash that started in 2014 has had a huge economic impact on the areas around the US shale plays. The 21 counties directly or indirectly involved in the production of Eagle Ford crude in South Texas saw a record-high economic impact of US$123.3 billion in 2014. During the subsequent two years of low oil prices, Eagle Ford’s impact dropped to close to US$49.8 billion in 2016, a new report by the University of Texas at San Antonio shows. (6/27)
The current state of methane hydrates development around the world is in studies, resource assessment, and production tests. The most recent estimates of gas hydrate abundance suggest that they contain perhaps more organic carbon than all the world’s oil, gas, and coal combined. (6/29)
Nuke on trial: Three former power company executives have gone on trial in Japan on charges linked to the Fukushima disaster. It is the first criminal trial over the 2011 meltdown at the nuclear plant. (6/30)
Fusion déjà vu all over again? According to the head of MIT’s Alcator C-Mod tokamak fusion project Earl Marmar, we could potentially have nuclear fusion powering electric grids by the 2030s — that is, if we’re dedicated to continued research. (6/30)