Quote of the Week
“The fall in discovered volumes for conventional oil outside North America [to just 2.8 billion barrels, the lowest level since 1952] has been steady and dramatic during the last few years. We’ve seen four consecutive years of declining oil volumes, which has never happened before. The bottom has completely fallen out for conventional exploration, and the result portends a supply gap in the future that is going to be challenging to overcome. In the current cost-cutting environment, the outlook for 2016 discovery volumes is not likely to be better, either.”
Leta Smith, director, IHS Energy, upstream industry future service
1. Oil and the Global Economy
2. The Middle East & North Africa
5. The Briefs
1. Oil and the Global Economy
Oil briefly traded above $50 a barrel last week but quickly fell back to close at $49.33 in NY and $49.32 in London on profit taking and uncertainties about the status of the global oil glut. For the past two months, oil prices have been driven higher by a series of unplanned production outages in Kuwait, Libya, Canada, Nigeria, and concerns about the political stability of Venezuela. Currently, about 3.5 million b/d of normal production is offline. While some of these outages, such as the 1 million b/d fire-caused drop in tar sands production, will be short-lived, other situations such as in Nigeria, Libya, and Nigeria could last indefinitely.
US crude inventories fell by an unexpected 4.2 million barrels the week before last, but considering the 1 million b/d drop in Alberta production, most of which goes to the US, this was to be expected. Many believe that the US crude inventory will shrink in coming months due to the decline in US domestic production and the major production outages in Nigeria.
As oil pushes $50 a barrel again, many are asking whether a resurgence of US shale oil production will be starting soon. Comments from shale oil producers have been mixed. A few are talking about renewed drilling after oil gets above $50 a barrel, but most say that a prolonged period of oil above $60 in necessary to stimulate production even using the new “more efficient” production methods. The US oil industry is in turmoil right now with news of yet another bankruptcy coming almost daily. US banks have taken a big hit by the drop in oil prices and are unlikely to finance efforts to increase production by money-losing enterprises. The US shale industry, however, still has a large number of drilled but uncompleted wells that could be brought into production at relatively modest costs as the capital costs have already been expended.
While the US shale oil wells can be brought into production rather quickly, there is little sign that the large international oil companies that drill expensive deepwater wells these days will be increasing production anytime soon. Capital costs to drill these wells are believed to be well above $100 a barrel, and there have been several cancellations of contracts to drill new offshore wells in recent months. Cancelling these contracts can be expensive – Statoil recently paid $61 million to get out of a contract with Seadrill.
The most interesting question at the minute is where the world’s oil supply is going to be in the next decade. A new report says that new oil discoveries were only 12 billion barrels last year due to the massive cuts in capital spending by the oil companies. With the continuing decline in capital spending, new discoveries are likely to be still smaller this year. Given that the world currently is consuming some 35 billion barrels of oil each year, and that production from current wells is falling at 7-8 percent each year from depletion, shortages are almost certain to develop within the next 5-10 years unless there is a major revival of drilling. While some are looking to a revived shale oil industry, others believe that the US will be out of “sweet spots” where oil that is profitable below $100 a barrel will be gone soon.
2. The Middle East & North Africa
Iran: Tehran continues its efforts to increase its oil production and exports as fast as possible, stimulating the Saudis to do the same. The Iranians are currently exporting about 2 million b/d and expect to increase this to about 2.2 million by the middle of the summer. People wishing to buy oil from Iran are having trouble finding banks to handle the transaction. Lingering US sanctions on Iran are causing the large banks which have large dealings with the US to steer away from Iran for fear of running afoul of US regulations.
Iranian efforts to get into the LNG business have been on hold since the beginning of the sanctions. The country has the world’s second largest reserve of natural gas. The country does not have the infrastructure necessary to chill or transport the gas and is currently #2 in the world in the flaring of natural gas – which costs the company $3.5 billion in wasted gas each year. Increasing crude production is adding to the problem. Completion of terminals to chill and export LNG is still 2-3 years away. Tehran is also considering building a pipeline to Turkey to export gas to the EU or possibly a pipeline to Qatar, using the terminal facilities already in place.
As relations between Riyadh and Tehran continue to deteriorate, the Iranian government has banned its citizens from making the pilgrimage to Mecca which is required of all Muslims.
Syria/Iraq: The Islamic State has launched an offensive into territory controlled by moderate insurgent groups and Kurds in northern Syria. Thousands are fleeing the attack to avoid falling under the control of ISIL. This organization was able to carry out a wave of bombings in Syria last week in Tartous and Jableh on the northwest coast where most of the Assad government’s supporters live.
These attacks in Syria comes as offensives are underway to take Mosul and Fallujah in Iraq which would substantially reduce territory and people controlled by ISIL. These attacks, which are backed by US and allied airpower, should help the Kurds and Iraqi security forces gain some tactical success. The underlying conflict between Sunnis and Shiites suggest that it will be many years before the conflicts are resolved.
Iraqi oil production is now running about 4.7 million b/d, but many are concerned that this number will be dropping soon due to electric power shortages and the lack of money to make needed investments. There has been considerable political trouble in the oil-producing region around Basra of late and the government has been forced to bolster security forces in the area. Little progress has been made on the formation of a new government in Baghdad.
Libya: There was some movement in Libya last week. Militia forces from Misrata are moving to surround the Islamic State insurgents who took over Sirte last summer and established a government. In the meantime, the “Libyan National Army” which is loyal to the eastern government in Tobruk, which has not yet voted on joining the UN’s Government of National Unity” in Tripoli, is also moving on Sirte. The Libyan National Army is commanded by General Haftar, who does not want to give up command of the Armed Forces to the new Government of National Unity. Mixed up in all this are special forces units from several western countries, including the US, that are trying to rid the country of the Islamic State, stop the waves of migrants from sailing to Italy from Libyan ports and in general stabilizing the situation.
Doubts are growing as the whether the Government of National Unity, which has now been in place for two months, will be able to unify the country. So long as the eastern government in Tobruk refuses to vote on joining the Tripoli government, little can be done to unify the country or deal with the Islamic State, migrant, and oil production problems. While the new government enjoys the backing of the UN, which means the US and the EU, it seems to have gained little support among the diverse peoples that make up Libya.
The National Oil Company reported last week that is production is now more than 300,000 b/d since the al Hariga terminal near Tobruk was opened and could soon reach 360,000 b/d. The country could produce more than 1.5 million b/d, but various local militias are holding oil production hostage to improve their position in bargaining with the central government. Like Iraq, the country is made up of numerous tribes that in the past have only been held together as a country by force of arms.
Saudi Arabia/Yemen: The Saudis are offering extra crude oil to customers in Asia, a sign that the country does not intend to cut its output in the near future. The country produced an average of 10.2 million b/d of crude last year, up from 9.5 million in 2014. Saudi Aramco is said to be increasing its market share in preparation for privatizing a small part of the company as part of the effort to diversify the economy.
Some are saying that the new Saudi “Vision 2030” plan is the end of OPEC as the Riyadh shifts its interest away from oil production to a more diversified economy. Last week the Saudis signed a $1.4 billion deal with GE to build manufacturing facilities in the kingdom. The government is also planning to revive a solar power program that will install some 9.5 gigawatts of electricity production over the next 15 years.
Fighting continues in Yemen while peace talks continue in Kuwait. Tehran is talking about taking a more active role in the civil war including sending advisors to the Houthi rebels. Iranian arms shipments to the Shiite Houthis have already been intercepted by the Saudi Navy.
Oil output has fallen to a 20-year low as the Niger Delta Avengers continue to attack pipelines in the southern swamps. Before the new attacks on Saturday on major gas and crude pipelines belonging to Shell and Agip, Nigerian oil production was estimated to be down to 1.4 million b/d from 2.2 million last year. Production now is likely down to at least 1.2 million b/d about half of which comes from offshore facilities which are harder, but not impossible, to attack.
The government forbids oil companies from publically announcing how badly their production has been hurt by insurgent attacks, so outside observers have to make their own estimates. The militants want a greater share of the oil wealth that is currently being squandered by the central government and is angered by a two-thirds cut in a 2009 government program that paid some 30,000 militants not to attack the pipelines. The cuts were prompted by low oil prices and falling revenues.
Government efforts to send more troops to the region has done little good as blowing up pipelines in the swamps is relatively easy to do and hard to stop. There have been reports of harsh treatment of local civilians by security forces that are trying to end the attacks
President Buhari is planning to open talks with the militant leaders who are demanding that all oil production cease in the region by May 31st.
In other developments, it was revealed that Nigeria owes foreign airlines servicing the country some $575 million or more. Nigeria is starting to sound like Venezuela which lost much of its air service for failure to remit revenues earned in the country. It was also learned that former President Goodluck Jonathan will not return from a trip abroad and may be hiding out in the Ivory Coast. Government investigators want to talk to Jonathan about billions in oil revenues that disappeared while he was president.
The country is weeks or perhaps even days away from collapse. There are serious shortages of food, water, electricity, medicines and nearly everything else. Looting of food stores and trucks has begun. The government is clinging to power to delay investigations of corruption and mismanagement that will follow its departure. The country owes some $50 billion in foreign debt and should it default, it risks losing the investment in Citgo Petroleum which owns three refineries in the US and is the main generator of cash. The government is selling off its gold reserves to continue imports.
Venezuela’s state oil company PDVSA owes US and other foreign suppliers some $20 billion in unpaid invoices. The company has begun offering it creditors heavily discounted company bonds in return for canceling the debts. US oil service contractors have begun to reduce their services to PDVSA for lack of payment, and the company’s oil production is slowly dropping. Should the country collapse, all or much of the country’s oil exports could stop.
The meltdown in Venezuela may spread to the Caribbean basin. Under the 20-member Petrocaribe program, member states have been purchasing cut-rate crude from the Venezuelan state oil company and given as long as 25 years to pay for the purchase. The small countries of Central America and the Caribbean have become dependent on the program for their energy supplies and will suffer if it is terminated. Some are saying that this is a good time to shift to wind and solar rather than use oil to generate electricity.
5. The Briefs
Oil discoveries have fallen to a six-decade low as explorers cut billions of dollars of spending to ride out the biggest market slump in a generation. About 12.1 billion barrels of oil reserves were found during 2015, marking a fifth consecutive year of decline and the smallest volume since 1952, Oslo-based industry consultant Rystad Energy said. (5/24)
Poorer oil-producing countries which took out loans to be repaid in oil when the price was higher have to send three times as much to respect repayment schedules now prices have fallen. This has crippled the finances of countries such as Angola, Venezuela, Nigeria and Iraq and created a further division within OPEC. (5/24)
Regulators tougher: As if the current oil markets weren’t tough enough for producers, companies are increasingly finding that regulators are making it harder to drill for new sources of oil. For instance, BP was recently told by regulators that it will need to revise and resubmit its plan to explore for oil off of the Southern Australian coast. The area is the largest relatively unexplored area in the world with potentially giant reserves of oil and has attracted interest from numerous oil majors. (5/24)
The US can supply Europe long term with LNG at $7-$8/million BTUs, based on long-run marginal costs for additional infrastructure, US LNG pioneer Cheniere said at a public hearing organized by the European Parliament’s energy committee. (5/24)
Offshore Norway, the race to discover oil and gas in virgin Arctic waters is now on, as Norway offered oil majors a lifeline on Wednesday by opening up what experts say could be home to 15 percent of the world’s undiscovered oil and 33 percent of the world’s undiscovered natural gas. Norway officials on Wednesday awarded ten new oil and gas licenses to explore the untapped area of the Arctic Barents Sea, an area that until 2011 was disputed for almost 40 years with Russia. (5/23)
Oil companies in Norway, Western Europe’s largest oil exporter, expect to slash spending for the third consecutive year in 2017 as they continue to downsize, delay projects and cut costs, an official survey showed Thursday. Oil companies operating in Norway expect to spend $18.47 billion on exploration and production next year, the weakest figure since 2011 and nearly a third below the sector’s all-time high two years ago. Lower oil-sector spending is set to damp the Nordic country’s growth, as oil and gas constitute nearly a fifth of its gross domestic product and nearly 40% of its export revenue. (5/26)
Offshore driller bust might last two years. Statoil canceled a contract for a drillship with Seadrill, which it had intended to use for drilling operations in the Atlantic, near Newfoundland. The cancellation is the second drillship contract to be terminated for Seadrill, coming shortly after Exxon canceled a contract for a drillship ($445,000/day) that had been dispatched off the Nigerian coast. Statoil paid Seadrill $61 million as compensation for canceling the contract. (5/27)
Maersk Drilling entered into an agreement with a Hercules subsidiary to acquire the harsh environment jack-up rig Hercules Highlander. The rig will move immediately from its shipyard in Singapore to start a five-year drilling program in the North Sea in a deal with BP and Japanese company JX Nippon. (5/27)
An English county government approved an application for what could be the first permit to frack for shale gas in Western Europe since 2011. The North Yorkshire County Council voted 7-4 to allow U.K.-based Third Energy to use hydraulic fracturing to extract shale gas from an existing natural gas well in Kirby Misperton in northern England. (5/24)
UK shale: A British geological organization said it was working to set an environmental baseline to serve as a basis for weighing the impacts of hydraulic fracturing. The British Geological Survey said its work with its university counterparts would set a baseline for water and air quality, as well as seismic activity, associated with a shale gas reserve in North Yorkshire. (5/25)
In France, a strike over new labor laws has spread to all of the country’s eight oil refineries, the CGT union says, in an escalating dispute with the government. An estimated 20 percent of petrol stations have either run dry or are low on supplies. Clashes broke out at one refinery early on Tuesday when police broke up a picket at Fos-sur-Mer in Marseille. (5/24)
France is braced for further disruption to its energy supplies as workers at oil refineries, nuclear power stations, ports and transport go on strike. But in a sign of the growing pressure on the government, PM Manuel Valls said the labor reforms at the heart of the dispute could be “modified.” Motorists have been panic-buying fuel. (5/26)
Total’s CEO Patrick Pouyanne said the company would “seriously reconsider” its French investments—including recent talk of developing shale oil—in the wake of the union-led labor protests that have forced Total to shut down several refineries. (5/25)
Oil-exporting countries of the Persian Gulf, from Qatar to Saudi Arabia, are turning to the public to sell debt as shrinking oil revenues erode their budgets. Qatar, which owns some of the world’s largest gas reserves, this week plans to sell about $9 billion worth of bonds in multiyear tranches. (5/26)
LNG pricing: The price of spot cargoes of liquefied natural gas in Asia has broken its long-standing link to crude oil prices this year, a development likely to fuel tensions in an already unsettled market. Spot LNG was assessed at $4.65 per million BTUs in the week to May 20, down 35 percent from $6.90 at the end of 2015. In contrast, global benchmark Brent crude pushed above $50 a barrel on Thursday, up around a third from the start of the year. (5/26)
India said Monday it will invest up to $500 million in a deal to develop a strategic port in Iran and both countries plan a number of projects they say are worth hundreds of millions of dollars. (5/24)
In Kazakhstan, a Chevron Corp.-led consortium is set to invest up to $37 billion as it increases output at the giant Tengiz field, the country’s energy minister said Wednesday. The investment represents a rare big commitment by a large oil company to spend on new production during a nearly two-year long slump in crude prices. Tengiz is one of the world’s biggest oil fields and a key source for Chevron’s growth in crude output in the next few years. The investment would start in 2017. (5/25)
China’s Yantai Xinchao Industry Co. is pursuing US oil acquisitions worth as much as $1 billion in the Permian Basin, and it won’t be satisfied letting others run the show, according to the head of the company’s US subsidiary. Unlike other Asian companies that bought stakes in US energy prospects in recent years, Xinchao is seeking so-called operator positions, or deals that give it primary authority over everything from how deep to drill to how intensively to frack each well. (5/25)
Egypt, riding high on a series of major discoveries and what appears to be renewed investor interest in its energy sector, is now targeting a 30-percent increase in natural gas production by 2019. (5/25)
South Sudan’s transitional government has announced it will resume oil production by July after a halt of more than two years during a bloody civil war for control of the newly independent country’s oil wealth. Though production will resume by July, pumping at fields will not reach the levels of production they enjoyed at their peak in 2010 for some time. (5/27)
Mozambique is heading towards a major default on $535 million in outstanding loans related to offshore natural gas infrastructure, symbolizing the deflating hopes for a major source of new natural gas production from East Africa. The state-owned Mozambique Asset Management took out loans to construct shipyards to service natural gas drilling off its coast. (5/25)
Panama Canal expansion & LNG: Nine years of construction work, at a cost of more than $5 billion, have equipped the canal with a third set of locks and deeper navigation channels that will open in June, doubling the isthmus’s capacity for carrying cargo between the Atlantic and Pacific oceans. The deeper channels will accommodate large LNG tankers, shaving eleven days and a third of the cost off the typical round trip to the Far East. (5/25)
The Alberta wildfire that has ravaged northern Alberta and cut Canadian crude output by 25 percent is set to crimp corporate earnings beyond the oil patch, especially hitting the rail and hospitality sectors. The fire, which has caused an estimated $50 million a day in lost production for oil sands companies near the evacuated city of Fort McMurray, has also caused pain to large companies that serve the sector and smaller ones catering to thousands of industry workers. (5/26)
Alberta pipeline: Canadian energy regulators handed a win to Alberta’s oil sands producers last week, recommending approval for a major oil pipeline expansion to the Pacific Coast. Canada’s National Energy Board determined that the expansion of the Trans Mountain pipeline is in the public interest, handing the project’s developer, Kinder Morgan, a key victory. (5/24)
The US oil rig count declined by two to 316, Baker Hughes Inc. said on Friday. That compares to 646 oil rigs one year ago and 1,609 rigs at peak in October 2014. Before this week, drillers cut on average 11 oil rigs per week for a total of 218 so far this year. They cut on average 18 oil rigs per week for a total of 963 in 2015, the biggest annual decline since at least 1988 amid the biggest rout in crude prices in a generation. Gas rigs gained two last week for a total now of 87. (5/27)
US petroleum and natural gas production first surpassed Russia in 2012, and the US has been the world’s top producer of natural gas since 2011 and the world’s top producer of petroleum hydrocarbons since 2013, according to the US EIA. (5/24)
Thunder Horse: BP is seeking to extend the production life of one of its biggest operated deepwater US Gulf of Mexico fields with a major water injection project. The water injection project is part of BP’s strategy of continued investment in its existing deepwater Gulf of Mexico production hubs. (5/27)
At BP, the surprise departure of their exploration boss has turned the spotlight on an oil search strategy that, after years of spending cuts, is focusing mainly on expanding existing fields rather than venturing expensively into the unknown. That caution reflects a firm chastened by the $55 billion cost of its 2010 Gulf of Mexico spill, and needing to squeeze every last drop out of a sharply reduced exploration budget at a time of low oil prices. (5/24)
In North Dakota, state data show the number of rigs searching for or producing oil and gas as of Monday broke a record low set more than 10 years ago. State data show 25 rigs actively producing or exploring for oil or natural gas as of Monday. By two rigs, that breaks a record low set in July 2005. (5/24)
Bakken: One of the key factors in the survival of the Bakken oil patch in the future will be affordable transportation options. Bakken producers receive lower realized prices for their output due to the transportation costs associated with moving the product as well as the difficulty in storing it. Pipelines are the next step for the Bakken if it is to become a sustainable long-term oil producing area. Yet putting in a simple pipeline may be more difficult than it appears – a state of affairs that may jeopardize the long run feasibility of shale production in North Dakota. (5/26)
Bankruptcy: For the second time in less than a year, oil services provider Hercules Offshore is heading for Chapter 11 bankruptcy protection by entering a restructuring support agreement. (5/27)
Enbridge Energy Partners’ crude rail terminal located just outside Philadelphia was hailed as a symbol of the region’s energy rebirth when it first opened in 2012. For years, a steady stream of shipments arrived and offloaded. But the scene now is very different. The terminal has not received a delivery of crude oil since late January and none is expected anytime soon as foreign crudes are expected to remain more economical compared to domestic grades. (5/27)
Delinquencies on auto loans have spiked in the US counties that had the highest employment in the oil-and-gas industry, according to the Federal Reserve Bank of New York’s quarterly report on household debt and credit. Mortgage delinquencies have also climbed, though not as dramatically. (5/25)
Earthquake insurance: The state government in the shale state of Oklahoma said it is concerned about the lack of competition in the market for earthquake insurance. Just four insurance companies claim more than half of the state market for insurance coverage for earthquakes, during a time when earthquakes are on the rise. Two minor tremors in Oklahoma, along with another small seismic event just north of the border in Kansas, were recorded by the US Geological Survey last week. (5/26)
The US average retail price for gasoline was $2.30 per gallon on May 23, 47 cents lower than at the same time last year, and the lowest average price just before Memorial Day weekend (the start of the summer driving season) since 2009. (5/27)
Five years after the Fukushima tragedy, TEPCO’s chief of decommissioning Naohiro Masuda admits that the company still has no idea exactly where 600 tons of melted radioactive fuel from three nuclear reactors are located. (5/27)
Solar jobs boom: The number of US jobs in solar energy overtook those in oil and natural gas extraction for the first time last year, helping drive a global surge in employment in the clean-energy business as fossil-fuel companies faltered. Employment in the US solar business grew 12 times faster than overall job creation, the International Renewable Energy Agency said. (5/26)
Solar Saudi: Saudi Arabia is seeking to revive its stalled solar-power program, scaling back more ambitious targets it set four years ago after making little headway in transforming the energy supply of the world’s biggest oil exporting nation. The Kingdom plans to install 9.5 gigawatts of renewable energy under its Vision 2030 program announced last month, about a quarter of the previous goal. The new target is about 14 percent of the country’s current generating capacity and is achievable because of a plunge in the cost of photovoltaics, government officials said. (5/26)
When the Atlantic hurricane season starts this week, the most active area might just be off the US East Coast. The basin typically reaches its statistical peak for mayhem on Sept. 10, according to the U.S. National Hurricane Center. (5/26)
Water problems: The water in Lake Mead, the largest US reservoir, has sunk to a record low, due to the severe drought in the American Southwest. The reservoir is at only 37 percent of capacity, according to the US Bureau of Reclamation. (5/25)