Quote of the Week
“Most of the fields in Argentina are mature, and they are declining in production. A lot of investment [$20 billion per year] is needed to sustain production. This is having an impact on production curve now [with the rig count down from 112 in 2014 to 64 in February].”
Alejandro Gagliano, a partner at Giga Consulting in Buenos Aires
1. Oil and the Global Economy
2. The Middle East & North Africa
5. The Briefs
1. Oil and the Global Economy
The six-week long surge in oil prices which pushed the price of crude up by roughly 50 percent seems to be coming to an end with prices down 6 percent last week. Looming behind the price increase was the notion that the world’s major crude exporters would to get together and sign an agreement to freeze production at current levels. Supporting the price jump was an increase in US gasoline consumption as prices fell to levels not seen in decades and the never ending hope that the US economy was about to get better. Much of the surge was caused by the liquidation of the unprecedented short futures positions that hedge funds and other speculators had built up during the nearly two-year slide of oil prices. When oil fell below $30 a barrel, many speculators figured that the long price slide was over and that oil was unlikely to go much lower. The resulting liquidation of positions which pushed up prices was the largest on record.
Last week the Saudi deputy crown prince said his country would not be agreeing to any production freeze as long as its dire enemy, Iran, continued to increase its production. This assertion threw into doubt whether the Doha meeting which is to take place on April 17th will actually occur and even if it does, whether an agreement on a production freeze will be signed. This fear that there will not be an agreement was reinforced by Kuwait’s announcement that it is about to reactivate a 300,000 b/d oil field – adding still more oil to the glut.
Among the pressures tending to push prices lower is the continuing buildup in global crude stockpiles. The slower-than-expected decline in US oil production despite a large drop in the number of active drilling rigs is weighing on the markets as is a substantial increase in US oil imports and an unexpected drop in US oil exports in the last few months. Last Friday, these forces came together to cause the worst price drop in a month. New York futures closed out last week at $36.79 and London closed at $38.67. This was a drop of 6 percent last week and 11 percent for New York futures since the high for this year’s rally was touched on March 22nd.
US production still is forecast to continue dropping this year, and output from several of the weaker oil exporting states continues to slip slowly. However, Iran’s drive to increase exports and the massive oversupply which is filling storage depots around the world that continues to grow suggests that a fundamentals-supported price rebound is still some months away.
Concerns are growing about five of the weakest oil exporters, known as the fragile five, which could easily suffer a political collapse and cease to export oil in the foreseeable future. These countries – Algeria, Iraq, Libya, Nigeria, and Venezuela – suffer from a variety of economic and geopolitical ills which could easily turn one or more into failed states unable to export much oil. These five countries are producing total of about 10 million of oil per day; have little in the way of other revenues; with the exception of Libya, do not have the large sovereign wealth funds that other oil exporters have accumulated in the last decade; and are currently selling much of their oil below the cost of production. Should one or more of these exporters collapse within the next two or three years, the global glut of stored crude could quickly be eliminated. If this is coupled with the coming impact of the massive reduction in capital expenditures by oil companies to find and produce more oil that is currently underway, oil prices could be at record levels before we are very far into the next decade.
In the meantime, the situation in the US oil industry continues to deteriorate. The latest concern is for the wellbeing of the banks that have loaned the billions of dollars to shale oil drillers in the last decade. Some foresee that the regional banks that have too much invested in oil could be in trouble before the year is out. It seems reasonably certain that many banks are going to cut the lines of credit for many smaller shale oil drillers in the next few weeks which could drive them into bankruptcy. Some 50 North American oil and gas producers have declared bankruptcy since early 2015. However, these are mostly small firms that had accounted for only a tiny share of US production and are having little impact on production. Many companies have continued to produce oil in the midst of bankruptcies as there is little marginal cost to keeping the oil flowing as compared to the expense of drilling and fracking new wells.
The EIA reported last week that the costs of drilling new shale oil wells last year were 25-30 percent lower than in 2012. While some of this came from efficiencies such as drilling multiple wells from a single pad, much of the cost has come from major reductions in pay scales in what has become a buyers’ market.
There was yet another flurry of concern about the effects of climate change on sea levels last week when a new study was released showing that melting of the Antarctic ice cap could contribute to raising sea levels by as much as three feet by the end of the century. When combined with Arctic ice melts sea levels could be up by as much as five or six feet by 2100, devastating many of the world’s coastal cities.
2. The Middle East & North Africa
Iran: The IEA said last week that it expects that Iran can increase its oil supply by some 500,000 b/d from sanction levels, but that getting to its goal of a 1 million b/d increase will take time and money to drill new oil fields. The IEA’s executive director Fatih Birol suggests that it would be misleading to expect a huge amount of Iranian oil hitting the markets in the near term.
Tehran says it will attend the Doha conference on a Russia-OPEC production freeze later this month, should it actually occur. The Iranians do not intend to join any freeze agreement, merely observe the proceedings. President Obama said last week that Tehran is making “real progress” in living up to its part of nuclear deal and said that he was preparing to lift some of the restriction on Iran’s access to the world banking system. In the meantime, Iran’s Ayatollah Khamenei has backed the missile tests as important to Iran’s future. Many have noted that these missiles are only useful for delivering nuclear weapons and could someday become part of a nuclear deterrent against threats from nuclear-armed powers.
Syria/Iraq: With the aid of Russian tactical air strikes, Assad’s forces and their allies are making steady progress in pushing back ISIL forces in central Syria. The numerous air campaigns against ISIL military, economic, and financial assets are starting to take a toll. Troops are not being paid; leaders are being killed; and, in general, the prospects for the “caliphate” continuing in its current form are diminishing in Iraq as well as Syria.
Although Iraq’s exports continue to inch up, concerns are increasing about the stability of the government in an era when oil revenues no longer cover government expenses. Some 8 million Iraqis are now on the government payroll and oil revenues down from $4 to $2.5 billion a month are no longer sufficient to pay all the government employees. Local leaders around the oil center of Basra are seeking some sort of independence from Baghdad, and radical Shiite forces are starting to hold large demonstrations against the government.
The prime minister has recently reorganized his cabinet, installing technocrats in hopes of reducing the corruption that is rampant in the country. So much is being stolen that foreign donors are becoming reluctant to contribute money to clean up the increasing mess as more people become refugees. Despite increasing oil production, largely through the efforts of foreign firms and territorial losses by the Islamic State, the overall political situation in the country points to ever increasing instability in a territory that simply does not have enough cohesiveness to remain as a state. The long range outlook for Iraq remains cloudy.
Libya: Last week the new UN-sponsored “Unity Government” arrived at a well-guarded naval base in Tripoli and took up residence. The leaders of at least ten Libyan cities declared their support for the new and now third government of the country. Over the weekend, Libya’s National Oil Corporation, which has had all the revenue and has remained sort of neutral during the “two government” crisis, announced that it was working with the new unity government and welcomed the UN’s effort to ban illicit oil exports by the Tobruk government in the East. The UN has called on its member states to recognize the new unity government and to break relations with the Tobruk assembly and the Libyan Dawan militias which have had control of Tripoli.
The Petroleum Facilities Guard, which actually controls the major oil export facilities, also announced that it was supporting the unity government and was preparing to open more export terminals. This is a good sign for the country. The major remaining problems are the eastern government in Tobruk which so far has not voted to establish the unity government and the Islamic State which controls Sirte and other cities along the coast.
It is too early to tell, but the situation in Libya and its chances for increased oil exports seem to be looking up.
Saudi Arabia/Yemen: Deputy Crown Prince Bin Salman is claiming that significant progress in being made to end the war in Yemen through negotiations. The Saudis have been unwilling to send large numbers of ground forces into the conflict and have resorted to bombing, which has killed a lot of civilians, to bring about a negotiated settlement. A prisoner swap has already begun. The 6,000 deaths, many by bombing, has brought much international condemnation of the Kingdom.
There were some interesting stories out of Riyadh last week amid reports that the Saudi economy is showing increasing signs of strain from diminished oil revenues. Among the many revelations that came from an interview with Deputy Crown Prince bin Salman last week was the news that the Saudis plan to sell less than 5 percent of Saudi Arabian Oil Company to raise badly needed cash, but will do so before 2018. The Prince also reaffirmed that his country will not join in any oil production freeze unless the Iranians do as well – an unlikely proposition.
The major news, however, was the announcement by the Prince that the government plans to set up a $2 trillion “Public Investment Fund” that will aid in diversifying the economy into new sources of revenue in a post-oil era. The fund, which would raise 50 percent of its capital from abroad, would become the main source of revenue for the Saudi government. Some question whether the Saudis have waited too long to start a major diversification of its economy. The plan would have a better chance of success with oil above $100 a barrel rather than below $40 as we see today. Efforts at diversification by other oil-rich Gulf states have not gone well. The country has few other natural resources, cannot feed itself, and is facing the brunt of climate change in coming decades.
The government has been doing its best of late to suppress the generally held idea that the Chinese economy is slowly coming unstuck amid too much debt, ignoring of environmental concerns, overcapacity, and falling exports. Recent Western assessments of the financial outlook for various Chinese firms have been denounced as too pessimistic. The justification for one-party rule in China has always been its ability to develop the policies that will deliver superior economic growth. If this should slip away the government’s primary concern is social unrest.
The government reported last week that China’s manufacturing rebounded to a nine-month high in March due to recently enacted structural reforms. Many have doubts as to the veracity of China’s economic reports which are becoming more of a political document as the economy shrinks. Of more interest may be the foreign trade statistics which give a better insight into what is going on.
China’s car sales which have grown from 10 to 20 million vehicles per year since 2008 may be causing dislocations in China’s oil industry. As China is still far from saturated with motor vehicles, scrapping of used cars is still far below the 20 million new vehicles added to the inventory each year, hence the demand for ever more gasoline continues to rise. As each barrel of oil produces relatively fixed amounts of gasoline and diesel, the increasing demand for gasoline is resulting in surpluses of diesel which is mostly consumed by agricultural and industry which, if anything, are contracting.
The IEA expects that demand for gasoline in China will likely grow by nearly 7 percent a year for the rest of the decade, despite efforts to move as many drivers into electric cars as possible to counter pollution. Given growth rates for additional gasoline demand, the diesel surplus is destined to grow rapidly in coming years.
The Chinese may start four new strategic petroleum reserves sites this year in an effort to reach its goal of 100 days of fuel reserves by 2020. China currently only has about 30 days of reserves. China’s oil imports in February were about 8 million b/d, the highest on record. Most observers are expecting that China will surpass the US in the quantity of crude imported this year.
Moscow’s economy contracted by 3.8 percent year over year in the fourth quarter and the total GDP decline for 2015 came in at 3.7 percent. After a 20 percent drop in 2015, the ruble is up about 8 percent against the dollar this year thanks to the recent surge in oil prices. Russian officials are saying that the economy will return to economic growth in the second half of this year, but a lot depends on what happens to oil prices.
Russian oil production set a post-Soviet high of 10.912 b/d in March just slightly above the 10.910 record set in January. Russia’s oil exports for March rose by 5.1 percent to 5.59 million b/d. This suggests that, as yet, Moscow is making no effort to “freeze” oil production and exports before a meeting that is scheduled to take place in two weeks.
5. The Briefs
Reserves fall-off: The world’s biggest oil companies are draining their petroleum reserves faster than they are replacing them—a symptom of how a deep oil-price decline is reshaping the energy industry’s priorities. In 2015, the seven biggest publicly traded Western energy companies, including Exxon Mobil Corp. and Royal Dutch Shell, replaced just 75% of the oil and natural gas they pumped, on average. (3/29)
In the UK after many years of decline, production of petroleum and other liquids increased by about 100,000 b/d in 2015. The largest contribution to this increase came from fields that were brought online in the second half of 2014. Significant increases also came from fields that came online in 2015. (3/29)
Royal Dutch Shell said it plans to raise $30 billion from asset sales worldwide as it moves to offset the cost of the BG acquisition, completed last month just weeks after oil prices plunged to a 13-year low near $27 a barrel. But the company has yet to identify in public precisely which fields will be under scrutiny. (3/28)
Israel’s Supreme Court on Sunday ruled against a landmark deal to develop and export the country’s offshore gas reserves, a setback for Prime Minister Benjamin Netanyahu. The panel of judges called the deal unconstitutional, citing a clause in its framework that gave energy companies pricing and regulatory stability for ten years regardless of potential shifts in the government. The deal will be suspended for one year, to allow for revisions. (3/28)
India’s state-run explorer is sticking with plans to keep drilling despite crashing oil prices. The company’s counter-cyclical approach to investing is based on a fact and an assumption. The fact: with other companies abandoning projects, costs will never be cheaper. The assumption: that same abandonment means prices will rise in coming years as growing demand overwhelms supply that’s fallen due to lack of investment. (3/30)
China’s national oil giants are maintaining large workforces even as Western peers continue to slash payrolls in response to the collapse in oil prices. China’s firms have kept in step with the rest of the industry by reducing spending on exploration and other new investment to increase profits, but cost-cutting largely stopped when it came to payrolls with as many as hundreds of thousands of employees. (3/30)
In China, oil’s plunge has reordered the pecking order among the three biggest explorers. China Petroleum & Chemical Corp.’s (Sinopec) move to close some high-cost fields has caused it to slip to number three in oil and gas production as rival Cnooc Ltd. got a boost from new domestic offshore projects. PetroChina Co. remained the largest, at 1.49 million b/d. (3/30)
China’s natural gas demand has been boosted by price cuts aimed at switching users from coal to the cleaner-burning fuel. (3/30)
Japan’s domestic oil product demand except for power generation is forecast to fall 1.6 percent year on year to 2.92 million b/d, in fiscal 2016-17 (April-March), according to a forecast presented by the Ministry of Economy, Trade and Industry. (4/1)
In Nigeria, fuel lines stretched for more than a kilometer on Friday in the capital Lagos because of a fuel shortage in sub-Saharan Africa’s top oil-producing country. While officials promise a solution within a week, analysts say it will take longer to resolve a shortage they say is the product of longstanding refinery issues and pipeline outages. (4/2)
Nigeria will propose Mohammed Barkindo, former group managing director of state-owned Nigerian National Petroleum Corp., for the position of OPEC secretary-general. Barkindo worked at NNPC until 2010 and served as acting secretary-general of the Organization of Petroleum Exporting Countries in 2006. (4/1)
In the Falkland Islands, British oil companies with offshore oil interests suffered a blow on Tuesday when a UN commission said that the waters around the South Atlantic archipelago belong to Argentina. It is the latest flare-up in the long-running diplomatic row over the sovereignty of the Falkland Islands that has engulfed oil and gas exploration companies. (3/30)
Argentina’s oil production declined 1.6 percent in January on the year, extending a slide that started in 1998, energy ministry data shows. This means that January’s production was 38 percent less than the record 847,000 b/d in 2004. The Argentine Oil and Gas Institute, an industry group, estimates that $20 billion annually must be invested to sustain production growth. (3/30)
Brazil’s troubled state-run oil company Petróleo Brasileiro SA announced a beefed-up voluntary layoff program that could affect up to 12,000 jobs amid intense efforts to cut costs. Petrobras has been making cuts across the board, reducing its once-ambitious investment plan and listing assets for sale as it tries to cope with low oil prices and a massive corruption scandal. (4/2)
Venezuela’s opposition-controlled National Assembly is questioning the legality of a $500 million deal Russia’s Rosneft made with the state oil company to increase its stake in a local oil venture. The Congressional Oil Commission agreed on Wednesday to reject any oil deal signed by the executive branch without approval from the National Assembly. (4/1)
Venezuelan gridlock: some 70 tankers were anchored around state-run PDVSA’s ports in Venezuela and the Caribbean, most of them waiting to load oil for exports and also to discharge imported crude and products. (3/29)
Venezuela’s PDVSA on Monday said it was the target of a smear campaign after the US Justice Department had said three of the oil firm’s former employees had pleaded guilty to charges over a scheme to corruptly secure energy contracts. The former PDVSA officials pleaded guilty under seal in December to conspiracy to commit money laundering. (3/30)
Mexico plans to cut spending next year in order to meet its zero deficit target as manufacturing exports slowed and lower oil prices weighed on revenue. Latin America’s second-largest economy will grow 2.6 percent to 3.6 percent next year, down from the 3.5 percent to 4.5 percent range forecast in a September budget report. (4/2)
Mexico’s proven oil and gas reserves fell 21 percent last year as oil prices dropped and discoveries were modest. Proven oil reserves fell to 7.64 billion barrels from 9.71 billion barrels, and natural gas reserves fell to 12.651 trillion cubic feet from 15.291 trillion cubic feet. (4/2)
The US oil rig count, viewed as a proxy for activity in the sector, fell by 10 last week, Baker Hughes said. But it hasn’t fallen enough to relieve the global glut of crude. The number of U.S. gas rigs declined in the latest week by four to 88. (4/2)
US oil exports decline: Just over three months after the authorities lifted the four-decade ban on crude oil exports, the US has actually exported 5% less this year than it did over the same period the year before, when the ban was still in place. (3/29)
US oil imports jumped to a three-year high in what looks to be a reversal of a years-long decline in the amount of foreign crude brought into the American market. As of March 25, the four-week average of imports was running at 7.9 million barrels a day, 9.8 percent higher than the year before. (4/1)
US refiners have started the routine maintenance necessary to switch over to processing the summer blends of gasoline. In response, the national average retail price for a gallon of regular unleaded gasoline hit $2.04 last week, nearly 3 percent higher than the previous week and the first time the national average price moved above $2 in 2016. (3/30)
BP has announced it will lay off 500 of its workers in Houston. The Houston workforce reductions are part of BP’s larger plan to cut 4,000 jobs globally in its upstream segment in 2016. (3/30)
Redetermination season, a twice-yearly ritual in which banks reassess credit lines to oil and gas companies, is once again upon us, and they are likely to be Scrooge-like. The result could be that more companies are forced into financially desperate types of financing or bankruptcy filings. (4/1)
Bank risk: As oil prices plunged, concern over energy companies’ ability to pay back loans drove investors to unload or bet against financial stocks judged to have the most at stake in the sector. So far, the rebound that pushed oil to around $40 a barrel has done little to dilute that speculation. (3/29)
For offshore Virginia, the US Bureau of Ocean Energy Management announced approval for the first-ever wind energy research facility this week. The research plan envisions the installation of two 6-megawatt turbines, which could generate enough power to meet the annual demands of 3,000 homes. (4/1)
Earthquake link expanded: Hydraulic Fracturing and Seismicity in the Western Canada Sedimentary Basin” confirms the horizontal drilling technique is responsible for earthquakes. We already knew that injecting fracking waste into underground wells can cause quakes. Now it’s not just the injections wells, but the fracking procedure itself that can be linked to seismicity. (4/1)
Oklahoma’s governor defended the state response to the seismic activity attributed to oil and gas development against a federal report on the hazard. Her comments followed the release of the first-ever report from the U.S. Geological Survey on human-induced seismic activity in the country. (3/30)
Nuclear fixes: Five years after the accident at Fukushima I in Japan resulted in three reactor meltdowns, the global nuclear industry is spending $47 billion on safety enhancements mandated after the accident revealed weaknesses in plant protection from earthquakes and flooding. (3/29)
Abengoa has filed for bankruptcy protection in the US as the Spanish renewable energy company continues talks with its banks and bondholders to agree on its plan to restructure billions of dollars in debt from its operations around the world. (3/30)
Wind transmission: For the first time, the Department of Energy used authority mandated by the Energy Policy Act of 2005 to foster cooperation between the private and public sectors on new electricity transmission projects by joining a line slated for the US South. The development, led by Clean Line Energy Partners, is aimed at bringing up to 4,000 megawatts of power generated from wind in Oklahoma and Texas through a 705-mile power line that would serve the energy needs of up to 1.5 million homes in the region. (3/29)
Coal company Alpha Natural Resources is asking a bankruptcy judge to let it slash retiree benefits and tear up existing labor agreements with its mine workers’ union, warning that its survival is at stake. Taking a page from fellow mining companies Patriot Coal and Walter Energy, Alpha said it is bleeding cash and that time is running out on efforts to broadly cut costs and offload liabilities. (3/30)
Chinese claims of reduced coal consumption and the corresponding decline in carbon emissions during 2014 may be off the mark. Researchers from Center for International Climate and Environmental Research – Oslo, or CICERO, show that a claimed 2.9 percent reduction in coal consumption is probably wrong, that coal-derived energy consumption stayed flat but is likely to have decreased in 2015, and that Chinese fossil CO2 emissions probably increased about 0.8 percent in 2014. (3/30)
Shares in US carmakers General Motors, Ford and Fiat Chrysler all fell on Friday after weaker than expected domestic sales increases reignited debate about a possible downturn in the industry. Ford, the market number two, and Fiat Chrysler, the number four, actually announced 8 percent sales increases. Ford’s sales were led by a 13 percent surge in sales of SUVs which have enjoyed a boost from falling fuel prices. Fiat Chrysler’s sales benefited from the latest in a string of strong performances from its Jeep SUV brand, whose sales were up 15 per cent. (4/2)
Volkswagen faces billions of dollars in potential new penalties after the top US consumer watchdog hit the automaker with a lawsuit over its emissions cheating scandal. The Federal Trade Commission is pursuing compensation for consumers that could rise beyond $15bn. (3/30)
Dyson is developing an electric car at its headquarters in Wiltshire with help from public money, according to UK government documents. The company, which makes a range of products that utilize the sort of highly efficient motors needed for an electric car, last year refused to rule out rumors it was building one. But on Wednesday, the government appeared to have accidentally disclosed Dyson is working on an electric car, along with other big companies outside of the automotive industry such as Apple. (3/28)
Climate risk information should form part of companies’ routine financial filings, a heavyweight task force led by Michael Bloomberg is recommending. As companies like Peabody Energy and Exxon Mobil face legal probes over allegedly lying about their exposure, it reinforces moves for greater transparency. (4/2)
Climate cases: Massachusetts became the latest state investigating whether Exxon Mobil Corp. misled investors and the public about how climate change may affect its business. News of the state’s probe came as part of a larger announcement on Tuesday by attorneys general from California to New York who are joining forces to fight global warming and look into whether companies have understated its effects. (3/30)