Helping America Navigate a New Energy Reality

Peak Oil Review – 30 Nov 2015

By on 30 Nov 2015 in Peak Oil Review

Quote of the Week

“We’ll demonstrate that we are serious about climate change. This means making decisions based on science; it means reducing carbon emissions, including through carbon pricing towards a climate resilient economy.”

Justin Trudeau, new prime minister of Canada

Contents
1.  Oil and the Global Economy
2.  The Middle East & North Africa
3.  China
4.  Russia/Ukraine
5. Climate change
6. The Briefs

1.  Oil and the Global Economy

Oil prices were little changed last week despite the the downing of the Russian warplane which temporarily sent prices higher on fears of a wider conflict affecting prices. At week’s end New York futures were down 19 cents for the week at $41.71 and London’s Brent was up 20 cents at $44.86. For November, oil prices will be down about 9 percent. There seems to be general agreement among observers that prices are headed still lower. Moscow announced that it will not be sending a high-level official to the OPEC meeting thereby foreclosing on the hints that Russia and OPEC were about to come up with a deal to cut production and raise prices.

The weekly US report had crude inventories up by a million barrels and US production holding steady at around 9.2 million b/d – down about 400,000 b/d since last April. The usual factors keeping downward pressure on oil prices remain in place — growing global inventories; a stronger dollar; a contracting Chinese economy; no sign that OPEC is about to reduce production; forecasts of a mild winter in the northern hemisphere; and the uncertainty as to what will emanate from the Paris climate conference that opens this week.  All these factors are raising fears that the $40 barrier soon will be broken and that prices will fall into the $20s.

While it is generally agreed that oil prices will start rising by the end of next year or possibly in 2017, concerns are growing as to what will happen to the oil industry if prices fall into the $20s and nearly all oil production becomes uneconomical this winter. With 250,000 layoffs so far and capital spending down by $100 billion with more cuts projected for next year, discussions are increasing about the consolidations and other restructuring of the industry.  A wave of bankruptcies is expected soon among the smaller companies that so far have been able to hold on despite the declining prices.

Some believe that the shakeout will be beneficial in the long-run for the US oil industry in that those companies that survive will have become so efficient that they will be competitive with lower-cost foreign producers after prices rebound.

The long range and possibly overriding problem, however, is global warming which continues to get worse with each passing year. So far the over-riding concern of maintaining and growing economies that are heavily dependent on fossil fuels has overcome warnings that the planet is on its way to becoming uninhabitable. While the oil and natural gas industries have been little affected so far by the global warming trend, the coal industry is currently seeing major reductions in demand, partly due to the particulate as well as the carbon pollution it creates.

Should pollution-free and less costly ways of producing energy emerge in the next few decades, or the consequences of increasing global temperatures become so severe the disruptions they produce can no longer be ignored, then the outlook for fossil fuels becomes dim at best.

2.  The Middle East & North Africa

Iran: The government is pushing ahead with efforts to comply with the nuclear agreement in hopes that lifting of the sanctions will revive its moribund economy. During a visit to Tehran to cement relations last week Russian President Putin agreed to swap some 660 pounds of partially enriched uranium for uranium ore. The nuclear deal requires that Iran reduce its uranium stockpile by more than 96 percent to ensure that the country is unable to quickly build an inventory of nuclear weapons. The major remaining problem, however, is the IAEA report on past Iranian efforts to build nuclear weapons — an undertaking which Tehran vehemently denies. The Agency has already hinted that Tehran has not been very forthcoming on the issue as the official policy is that they never had a project to develop a nuclear weapon. The report is to be issued this week and will be discussed by the IAEA’s Board of Governors on December 15th.

Whether this issue remains a showstopper remains to be seen. Tehran has been rushing to get the sanctions lifted and has been dismantling nuclear equipment at a rapid pace.  It is doubtful that the foreign powers involved in the treaty ever really expected the Iranians to come clean, and admit that they have been lying for years about their nuclear weapons objectives.  Hence, the issue likely will remain hazy even after the IAEA report is released. For now, it seems that there is so much momentum to get the agreement implemented by nearly everyone except the Israelis and Congressional Republicans, it seems likely that a vague IAEA report will not be enough to scuttle it.

In the meantime, Tehran is pushing along as if the end of sanctions is a sure thing. Over the weekend it revealed new model contracts for foreign firms looking to exploit Iranian oil. The new contracts will last 15-20 years, allowing foreign investors to fully recover their investment costs. In the past contracts to develop Iranian oil were for shorter terms after which the developed fields were returned to the Iranian oil company. Under the old scheme foreign investors complained about taking all the risks and frequently losing money. While Tehran hopes to attract some $30 billion in foreign investment with the new oil contracts, low oil prices and rapidly declining capital expenditures suggest that there may not be much investment until the oil markets recover.

In an interesting development, Iran has started to reveal that scores of its soldiers are being killed in the fighting taking place in Syria. In the past Tehran has been reluctant to talk about casualties its troops have been suffering which are thought to have been running at around 10 a month for the past two years. The new reports say that at least 67 have been killed since October. Analysts say Iran likely is proud of its intervention on behalf of the Assad government and does not like the Russian bombing getting all the credit for recent victories against the rebels.

Syria/Iraq: Most of the news last week concerned the fallout from Turkey’s shoot down of the Russian warplane.  In retaliation Russian President Putin has put in place a series of economic sanctions against the Turkish government. So far the sanctions seem to mostly involve tourist and business travel between the countries and imports from Turkey. They do not seem to cover Moscow’s large oil and gas sales to Turkey.

Russia’s bombing campaign against the rebels fighting the Assad government is causing large numbers of civilian casualties in contrast with the US and allied air campaigns which go to extreme lengths to limit civilian casualties. The Russians have fewer smart bombs so that many of their air attacks consist of destroying rebel-held villages and anyone who happens to be in them as their Iranian, Lebanese and Iraqi allies move to take the rubble. So far some 400 civilians are reported to have been killed and the toll mounts daily. The bombing is forcing tens of thousands out of the target towns and into refugee camps.

An air campaign is underway to eliminate the money that ISIL has been making in selling oil from captured oil fields. At least 1,000 oil tanker trucks have been involved in the movement of the oil. These are now being systematically destroyed by US and allied aircraft. While this will cut ISIL’s oil revenue, it will also cause hardships for the Syrians and Iraqis living under ISIL control as oil for electric power, transport of food, cooking, water supplies, etc. will soon be in short supply.

Libya: Libya’s state-run National Oil Corporation, which is under control of the government in Tripoli and not the internationally recognized government in Tobruk, has signed a deal with Glencore, a major trading house, to load and sell the oil from Marsa el-Hariga port near the eastern border with Egypt. Glencore is taking all the risks involved in chartering tankers, loading the oil and selling it on the world market. The government in eastern Libya naturally says it will stop shipments of any oil coming from ports it controls that benefits the Tripoli government.

In the meantime, ISIS is strengthening it grip on Misrata in Libya. The New York Times reports that Iraqi commanders have been arriving in Misrata and have begun public beheadings. The local station only broadcasts ISIS propaganda. Surt is already in the hands of ISIS and the government is totally in the hands of foreigners from Iraq and Syria. Some believe that ISIS is looking at a fallback location should the combined forces, which include much of the world, eventually overrun the areas they hold in Syria and Iraq.  The growing ISIS strength in Libya increases the possibility that there will eventually be Western intervention as ISIS uses the country as a base to strike elsewhere in Europe and Africa.

Saudi Arabia/Yemen: The war in Yemen is largely stalemated as a hodgepodge of local tribesmen, troops from the UAE and mercenaries recruited from Sudan attempt to advance against the more experienced Houthi rebels. The Houthis have no source of outside resupply, other than what they can smuggle through the Saudi blockade. The latest wrinkle is the arrival of some 450 mercenaries from Latin America, mostly Columbia, who are to take part in the fighting. While the Saudis continue to bomb Yemen, using the latest in US aircraft, smart bombs and intelligence, they are reluctant to send troops into the country in fear the casualties would cause a backlash against the royal family.

In the meantime, executions in Saudi Arabia are way up this year as the government tries to quell dissidence, especially by the minority Shiites. So far at least 150 have been executed this year for “terrorist crimes” and another 50 are due to be executed shortly. Some of those said to facing execution are said to have been under 18 at the time of the offense. Obviously the Saudi government is becoming worried about domestic stability.

Low oil prices continue to plague the government. Last week Crown Prince Mohammed bin Salman said that the government may lower energy and water subsidies as well as adding additional taxes. The government would like to lower domestic oil consumption by increasing nuclear and solar energy.

3.  China

Beijing’s economic problems continue. After the profits from large industrial corporations fell by 0.1 percent in September, year over year, they fell by 4.6 percent in October, the fifth straight monthly decline. Six interest rate cuts and expedited government spending have yet to revive growth as declining manufacturing and residential construction continue to plague the country. If the decline continues through November and December, the official growth target for the year may not be met, however, it is likely that “official” statistics will show that the goals have been met, no matter what.

China’s stock markets fell by 5.5 percent on Friday, the biggest slide since August as investigations into three major brokerage houses continue. Outside analysts have concluded that the government now owns at least 7 percent of mainland stock shares as a result of the governments intervention to prop up the markets last August. Two state financial institutions led the market bailout.

Winter smog has settled in over northeastern China with the PM2.5 index hitting 391 in Beijing on Saturday as opposed to the WHO safe level of 25. People have been warned to stay indoors until Tuesday when winds are forecast to blow the smog away. The Beijing Environmental Protection Bureau has solicited public comments on new emissions standards which are to be the world’s strictest and will cover all vehicles and heavy motors. The standards which will start in December of 2017 will require 40-50 percent emission cuts. How all this plays out at the Paris conference this week remains to be seen.  Beijing’s environmental problems have gotten a lot worse since the last UN conference and we are likely to see more movement this time.

4. Russia/Ukraine

It has been a busy week for Moscow which has had to deal with the Syrian shoot down situation as well as the Crimean power crisis and falling oil prices. A state of emergency was declared in Crimea last week after four power pylons supplying electricity to Crimea were blown up leaving some 2 million people people in the dark. Although Kyiv said it was moving to restore the power, by week’s end pro-Ukrainian “activists” were still blocking efforts to repair the transmission lines.  In retaliation, Moscow began to restrict coal supplies to Ukraine on Friday. Kyiv has a one-month coal supply in reserve for its power plants and is attempting to import coal from South Africa.  In the meantime, Moscow has halted natural gas supplies to Ukraine as the prepaid plan has run out. Ukraine has said it will continue to permit natural gas transiting the country to Europe to continue.

The ruble fell last week due to concerns over the shoot down and falling oil prices. Russia’s currency is now back to nearly 67 to the dollar, down 2.2 percent for the week. Russian government bonds had their worst week since August.

5. Climate Change

The week ahead is likely to be filled with stories about the climate change talks in Paris. Although the G-20 and the  biggest developing countries – China, India, and Brazil – have pledged to cut back on emissions, analysis of the various proposals shows that after all the cuts carbon emissions would be just about the same as they are now in 2030 and global temperatures would still climb by 3 degrees above pre-industrial levels.

The split between the under-developed countries and those that see no future for their peoples, unless they are allowed to burn ever increasing quantities of fossil fuels, and the rich countries that can afford massive investments in renewable sources of energy and energy efficiencies will continue. The under developed countries will continue to demand that the rich transfer wealth to them as the price for their agreement to curtail emissions. This, of course is ironic, as it is the underdeveloped countries that are likely to suffer the most in the next few decades from increasing global temperatures which have been caused by the development of the richer countries.

Then we have those with deep vested interests in continuing to grow fossil fuel production. This is manifested the most strongly in the US Congress where members from fossil fuel producing states are saying they will never agree to any treaty that restricts their fossil fuel industries. To bypass the US Congress, it seems likely that the conference will come up with some form of “agreement” rather than a binding “treaty” that would require Congressional approval. France, bowing to reality, has already conceded the point and is willing to settle for an agreement.

Despite the nearly universal agreement (with the exception of those with vested interests) of the need to restrict emissions if civilization is to continue in its present form, many officials involved in the conference such as the EU climate czar are skeptical that a meaningful agreement can be reached by the 195 governments taking part.

The only way out of this existential dilemma would seem to be the discovery of new, non-polluting sources of energy that are so cheap that they would quickly drive fossil fuels from the markets simply on economic considerations alone.  To this end, Microsoft co-founder Bill Gates will launch a multi-billion-dollar clean energy research and development program during the conference. Gates has pledged $2 billion of his personal wealth to jump start the initiative.

In the meantime, 2015 is likely to be the warmest year on record and nearly every week brings a report of an unprecedented weather condition occurring some place in the world.

6.  The Briefs

Norway anticipates a steep drop in the number of rigs deployed for exploration of oil and gas reserves offshore. Total investments in oil and gas are expected to decline by 11.8% during 2015. (11/25)

Poland seeks to shake up the nation’s power, gas and oil industries in the name of boosting energy security, with consequences for both dominant supplier Russia and the country’s partners in the European Union. Last week tankers with Saudi and Kurdish crude sailed to Polish refineries reliant on Russian oil, and a Qatari tanker was loading its first liquefied natural gas shipment for a Polish terminal. (11/23)

In the UK, National Grid, the company responsible for keeping Britain’s lights on, declared last month that the margin between electricity supply and demand over the coming winter would be “tight but manageable.” Three weeks later, National Grid had to issue its first call in more than five years for emergency supplies to keep the grid stable. (11/27)

Italy’s Eni will soon open the taps on the northernmost offshore oil platform in the world, even as energy companies retreat from exploration in the Arctic.  The new platform, 300 miles north of the Arctic Circle, offers a glimmer of potential for crude in the region—though at a considerable cost. The platform will eventually produce 100,000 b/d. (11/23)

Italian energy company Eni said in its annual review that oil and gas reserves in 2014 recorded “slight” growth, though most of the gains came from shale basins in the United States. While overall output from OPEC nations remains robust, Eni said the “most significant” increase came from non-OPEC members, where gains increased by 2.2 percent. (11/26)

Beijing will allow independent refineries to export refined fuel next year for the first time, sources said, freeing up 20 percent of China’s refining capacity for sales abroad as the government aims to cut a local glut and boost investment. This raises concerns about a fresh flood of excess diesel and other fuels into Asia. (11/25)

The launch of China’s crude oil futures is likely to be delayed, possibly until the second quarter of 2016, as authorities take a fresh look at crude grades included for delivery into the contract, while they step up efforts to ensure plentiful storage for participants. (11/26)

Brazilian billionaire banker André Esteves, co-founder of BTG Pactual, Latin America’s biggest independent investment bank, was the bold face of Brazilian finance during the country’s boom years of the first decade of the century. But now he is accused of trying to obstruct justice in a vast corruption investigation into Petrobras, the state-owned oil company. (11/27)

Falkland Islands: Rockhopper Exploration agreed to buy Falkland Oil & Gas in an all-share deal that values the explorer at $87 million. (11/24)

In Nicaragua, doubts over a planned $50 billion waterway across the country that aims to compete with the Panama Canal are set to intensify after the Chinese-led project was postponed by up to a year. (11/27)

Mexico is set to get a record payout of at least $6 billion from its oil hedges this year, according to data compiled by Bloomberg. For 2015, Mexico’s hedges through Goldman Sachs, JPMorgan Chase, Citigroup and others guaranteed sales at almost $30 a barrel higher than average prices over the past year. (11/23)

Mexico’s Pemex lost its highest credit rating ever as Moody’s Investor Service downgraded the state oil producer one level, citing a deteriorating credit profile because of lower crude prices, high taxes and falling production. The company, which is headed for an 11th consecutive annual drop in production this year, said total debt surged to a record $87.3 billion. (11/25)

Canada is poised to lose energy companies as the industry faces the “new normal” of lower and more volatile oil prices along with tougher climate and regulatory policies, according to billionaire investor Murray Edwards who is also chairman of the nation’s largest heavy-oil producer, Canadian Natural Resources Ltd. (11/28)

The US oil rig count declined by nine units during the week ended November 25 (a short week), according to Baker Hughes Inc. That’s the 12th decline during the last 13 weeks and brings the total rig count down to 555 which is about a third of the 1,572 oil rigs operating in the.same week a year ago. (11/26)

In the U.S., the EIA reports that during 2014 proved reserves of natural gas rose by 34.8 trillion cubic feet (tcf), or 10 percent, to a record high of 388.8 tcf, while oil reserves rose 3.4 billion barrels, or nine percent, to 39.9 billion barrels, the highest since 1972. Production of crude oil and lease condensate increased about 17 percent, from 7.4 to 8.7 million barrels per day. Gas output increased 6 percent, from 73 to 77 billion cubic feet per day. (11/24) (NOTE: data for 2015 are likely to erase a substantial portion of the 2014 gains.)

Oil industry near future: Among the major themes of upcoming cycle will be the recovery of US land drilling, offshore restructuring and more risk to service industries, Evercore ISI analysts say. Despite their relative safety during the downturn, large integrated oil companies must make some moves to get higher returns and more investor support. (11/24)

In the oil-producing regions of the US, the 17-month-long slump in crude prices is rippling beyond the oil industry into areas of the North American economy—such as housing and restaurants—that until recently had managed to avoid the worst of the downturn. (11/24)

US retail regular-grade gasoline prices continue to decline, averaging $2.09 per gallon as of November 23rd, 73 cents lower than this time last year and the lowest heading into a Thanksgiving holiday weekend since 2008. (11/26)

Traffic on U.S. roads grew by 3.4% in September, the fastest rate in almost two decades, as cheap gasoline, coupled with a strong economy, encourages motorists to use their cars more. The driving boom shows no sign of fading. (11/26)

The corn ethanol lobby is shocked—shocked, it says —that the US government has declined to list the Renewable Fuel Standard (RFS) as one of the measures the country will rely on to reduce greenhouse gas emissions over the next decade. The RFS is flooding the US fuel market with corn ethanol and other old, outdated, and underperforming biofuels, while failing to deliver on its promise of modern biofuels that may (or may not) help reduce the transportation sector’s negative impact on global climate change. (11/28)

Renewable Fuels Standard: As 2016 approaches, and the U.S. EPA is days away from the updated renewable fuel volume obligations for 2014, 2015, and 2016, the landscape—especially the need to reduce imports of foreign oil—that led to these implementations has changed considerably. The EPA proposes lowering the volume requirements by 20.5 percent. Lower profit margins for already shaky ethanol plants could result in plant shutdowns and consolidations. (11/24)

Coal-mining companies, whose stock prices have tumbled, have become the target of campaigners hoping to cast the sector as the new Big Tobacco. With a meeting of global leaders to discuss climate change beginning Monday in Paris, the campaign has been building support. Most recently, German insurance company Allianz, with about $4.25 billion invested in coal, mostly in bonds, said it will gradually exit from the sector over coming months as the bonds mature. (11/27)

Fusion: Humanity will wait 10 years for a major trial of hot fusion, a different form of nuclear energy regarded as a game changer in the centuries ahead. (11/25)

Israel’s Foreign Ministry says the country will soon open an office at a renewable energy agency (IRENA) in Abu Dhabi, the United Arab Emirates’ capital – even though the two nations have no diplomatic relations. IRENA, the International Renewable Energy Agency, has been part of a rapprochement between Israel and the UAE before. (11/27)

Weather-related disasters in the past two decades have killed more than 600,000 people and inflicted economic losses estimated at trillions of dollars, the United Nations said on Monday, warning that the frequency and impact of such events was set to rise due to climate change. (11/24)

In the US, since 2005, energy-related carbon dioxide emissions fell in 48 states (including the District of Columbia) and rose in 3 states. (11/24)

Climate: The year 2015 is likely to be the warmest on record, according to a report released by the UN weather agency on Wednesday. Meanwhile, the global average surface temperature in 2015 is to reach the symbolic and significant milestone of 1 degree Celsius above the pre-industrial era. (11/26)

States vs. Obama: State officials in West Virginia and Texas are sending a letter to the governments of China, India and other countries, arguing that US President Barack Obama’s plan to cut greenhouse gas emissions is unlawful and likely to be struck down in court. (11/25)

The Swedish government said it has a “minister for the future” that aims to steer the country toward a fossil-free economy by 2030. (11/25)

Statoil on climate: Oil and gas will continue playing a strong role in the global energy sector, but climate issues are sparking an industry sea change, the head of Statoil said. The US government has plans to cut emissions by about 25 percent of their 2005 levels by 2025, and similar commitments have come from Europe, Russian and Scandinavian countries. Eldar Saetre, CEO of Norway’s Statoil, said those commitments are not enough to keep climate change in check. (11/24)

Canada has executed a complete about-face on global climate change. With the defeat of the Conservatives in the October general election, out went nearly a decade of Canada making itself something of a global outcast on the issue. The new prime minister, Justin Trudeau, and his Liberals are now trying to make up for lost time by moving climate change policy to the top of the political agenda. (11/27)

The government of oil-rich Alberta in western Canada on Sunday pledged to phase out coal emissions by 2030, limit greenhouse gases from oil-sands production and implement an economy-wide carbon tax. The province unveiled the long-awaited plan one day ahead of a meeting in Ottawa among Prime Minister Justin Trudeau, Alberta Premier Notley, and the leaders of other Canadian provinces and territories to discuss environment policy. (11/23)

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