Quote of the Week
“The [California] legislature finds and declares that the Public Utilities Commission, State Energy Resources Conservation and Development Commission, and State Air Resources Board should plan for 100 percent of total retail sales of electricity in California to come from eligible renewable energy resources and zero-carbon resources by December 31, 2045.”
Senate Bill 100 reads
Graphic of the Week
1. Oil and the Global Economy
2. The Middle East & North Africa
6. The Briefs
1. Oil and the Global Economy
Oil prices had two down and three up days last week closing out Friday a dollar or so higher with NY futures at $69.80 and London at $77.64. The struggle between the soon-to-be-implemented Iran sanctions and the threat to demand posed by the trade war continues as the primary factor driving prices. An unexpectedly large drop in the US crude inventory of 2.6 million barrels last week and a four-unit increase in the US oil rig count last week contributed to the volatility of the market.
Reuters reports that oil analysts cut their price forecasts for 2018 for the first time in almost a year amid growing concern over the impact on crude demand from escalating trade tensions. Iranian oil exports are already falling rather smartly; however, there is a floor under how far they will fall probably somewhere between 1 and 2 million b/d. Chinese demand alone will ensure that they do not drop any further.
The US-China trade war, however, does not seem to have a definite end in the immediate future and many are wondering just how much economic damage the standoff will do. There are too many factors, such as the pace of oil production from Venezuela, Libya, and the Permian Basin, to say whether any decline in the global demand for oil will offset looming production problems.
OPEC: News from the organization has been sparse since the Cartel+ decided to raise its production caps in June. OPEC oil output increased last month to a 2018 high as Libyan production recovered and Iraq’s southern exports hit a record, although a cut in Iranian shipments due to US sanctions limited the increase. The cartel pumped 32.79 million b/d in August, the survey on Friday found, up 220,000 b/d from July’s revised level and the highest this year.
OPEC and non-OPEC oil producers will attempt to formalize their long-term cooperation later this year by approving a charter that will make possible further joint action on output controls. Russia and several other non-OPEC countries joined OPEC producers in reducing oil output since 2017 in a move that has helped raise oil prices to nearly $80 per barrel from a low $30 in early 2016.
OPEC and its allies announced last week that they would review the monitoring mechanisms of its output agreement at the Joint Ministerial Monitoring Committee meeting in Algiers on September 23 but said it sees the current oil market as mostly balanced. In December, OPEC will discuss whether its members can compensate for a sudden drop in Iranian oil supply after US sanctions against Tehran begin in November.
US Shale Oil Production: US crude oil production rose 231,000 b/d in June to a record 10.674 million b/d, according to the US Energy Information Administration in a pair of monthly reports on Friday. This data comes two months after the end of June and is usually more accurate than the weekly estimates which are proving to be too high.
However, figures by the Railroad Commission of Texas showed production in Texas dropped in June 2018 and was down 7 percent from May, the first yearly drop since February 2017. Initial data from the Texas Commission is usually far too low because of rules allowing producers to keep some of their production secret to avoid tipping off local competitors as to how well they are doing. For example, the initial Texas production number for June 2017 was 75.2 million barrels, but a year later that figure has been revised upwards to 90 million.
Other news concerning oil production from the Permian Basin, which is the only US oil field from which significant production increases are expected, has not been so good. Last week, prices for WTI in Midland slumped to their widest discount to WTI elsewhere since August 2014. Reuters estimates that the price discount of WTI in Midland to the U.S. benchmark exceeded $18 a barrel. Some West Texas producers say they will pull back on activity and delay well completions as a result of falling local oil prices.
The number of drilled but uncompleted wells (DUCs) in the Permian rose by 167 in July, to 3,470, accounting for around 43 percent of all the DUCs in the US, according to the EIA. The Keane Group, which fractures shale wells, said it expects DUCs to rise as operators continue to drill wells to hold onto specialized rigs. When prices are weak, producers hold off on completing wells.
The current pipeline capacity for moving crude out of the Permian is 3.1 million b/d. The EIA estimates that the Permian will have pumped 3.387 million b/d in August, and expects production to rise to 3.421 million b/d in September. If these numbers are valid, there is a severe shortage in the ability to move newly produced oil out of the Permian. Vista Proppants and Logistics say they have made a deal with logistics firm JupiterMLP to transfer crude oil from trucks to rail tanker cars at Pecos, Texas, and then ship crude on the Union Pacific Railroad until pipeline capacity catches up with rising production. Even if this scheme should work, it is likely that crude output from the Permian and hence from the US will not be growing as fast in the next year as has been forecasted.
2. The Middle East & North Africa
Iran: Iran oil shipments are declining at a faster-than-expected pace ahead of US sanctions set to begin in November. In the first half of August, Iran’s oil exports fell by 600,000 b/d, going from 2.32 million b/d to 1.68 million. Tehran’s exports have been falling all year, reaching their lowest level in four months by July and then dropping more rapidly last month. Indications are that August exports will be around 2.06 million b/d vs. a peak of 3.09 million in April.
South Korea, India, the EU, and Japan are cutting imports; however, Tokyo remains firmly committed to seeking US exemption for Iranian oil imports as it sees the Iranian oil as necessary for the country’s energy security. India will “definitely” not cut off entirely its crude oil imports from Iran, but it expects to reach some agreement with Washington at a meeting with US officials this week.
Beijing has been posturing over the US demand that every nation halt Iranian oil purchases, but most believe that China will continue to import at the pre-sanctions level, rather than attempting to undercut the sanctions by buying up oil that cannot be sold elsewhere.
The breadth of the US sanctions is having an impact on the Iranian economy. The threat of sanctions against tanker companies transporting Iranian oil, insurance companies covering Iranian cargoes, and financial institutions doing business with Iran are causing considerable trouble. Iran’s currency has fallen by more than half since the start of the year. The economic pressures have the government in turmoil with top officials being purged. The hardliners in Tehran seem to be gaining ground against the government of moderate President Hassan Rouhani. Rouhani’s real failure in the eyes of the hardliners was in trusting the United States when it agreed to the 2015 nuclear deal. The Trump administration’s withdrawal from the pact earlier this year was proof in Tehran that opening up and negotiating with the US was a mistake.
OPEC will discuss in December whether producers can compensate for a sudden drop in Iranian oil supply after US sanctions against Tehran start in November. Despite all the fuss, Iran has remained within the main restrictions on its nuclear activities imposed by the 2015 nuclear deal, a report by the UN indicated last week.
Iraq: In the meantime, Baghdad is waiting in the wings to increase its exports and seize Iran’s share of the oil market. OPEC’s Joint Ministerial Monitoring Committee is expected to discuss an increase in oil production during the next meeting, which is expected to take place on September 11th. The Monitoring Committee’s production plans will likely include a formula for how to divvy up the increased production limits by country, and Iraq wants to make sure it is included in those plans.
Iraq’s oil production has been increasing according to OPEC’s Monthly Oil Market Report, averaging 4.476 million b/d in the first quarter of 2018, increasing to 4.556 million for July. Iraq’s August crude oil exports are nearing 3.595 million b/d, according to the chief of Iraq’s state marketing organization. A settlement with the Kurds would enable Baghdad to increase its exports even further.
Saudi Arabia: The perturbations in Saudi oil production continue. Riyadh will report to OPEC that its crude oil production in August averaged 10.424 million b/d, up 136,000 from the July level of 10.288. However, the Saudis supplied 10.467 million b/d to the market in August, drawing on stored oil to supply more crude to the market than it produced.
Russian Deputy Foreign Minister Mikhail Bogdanov said on Friday that Vladimir Putin is preparing to visit Saudi Arabia. Global oil markets likely will be on the top of the agenda as will developments in Syria (where Moscow and Riyadh are on opposing sides in the ongoing Syrian Civil War), as well as talk about US sanctions on Iran.
Reuters released a new report last week concerning a split between Saudi King Salman, and his 32-year-old son and de facto ruler, Crown Prince Mohammed bin Salman. For the past two years, Saudi Arabia had been preparing to place up to 5% of its national oil company, Saudi Aramco, on the market. The planned listing was to be the cornerstone of the kingdom’s promised economic overhaul and, at a targeted $100 billion, the biggest IPO ever. The IPO was the brainchild of 32-year-old Crown Prince Mohammed bin Salman.
In late June, work on launching the Aramco IPO was halted. According to Reuters, King Salman stepped in and ordered the IPO stopped after he met with family members, bankers, and senior oil executives who told him that the IPO, far from helping the kingdom, would undermine it. The shelving of the Aramco IPO was a significant blow to the prince’s reform program, which aims to transform Saudi Arabia’s oil-dependent economy.
The question is whether the Aramco IPO fiasco is an indication of a fallout between the aging King and his favorite son. For now, Reuter’s sources say “No,” but this could change if the crown prince pursues policies that the King considers dangerous to his legacy. A split within the royal family could quickly evolve into a threat to the world’s oil supply.
Libya: Clashes broke out in Tripoli last week as rival militias vied for control over territory in parts of the capital city. A temporary truce is in place, though it may be tenuous as neither side is willing to give up territorial gains. An August report from the International Crisis Group found government unity in Libya is lacking given the mounting distrust running in leadership circles since the end of civil war. For some form of political agreement to take place, the group said everything from more transparency at the nation’s central bank to a more significant role for the UN mission might be necessary.
Libya’s oil production has been holding at around 1 million b/d for the past couple of weeks, rising slightly this week thanks to increased production at two small oilfields in the east. Libyan media is reporting that Ibrahim Jadhran, who led the devastating June attacks on Libya’s export terminals, is now teaming up with tribes and forces loyal to Muammar Gaddafi and Chadian rebels to plan a new strike on the oil region.
The Sino-American trade war and the Iranian sanctions remain important issues for China’s oil industry. Sinopec, China’s largest refiner which imports about 85 percent of its crude, says it will continue to buy crude oil from both the United States and Iran as keeping diversified sources of crude is essential to China’s well-being. Recent reports suggest that Chinese oil buyers can swap purchases of US crude for cargoes that are not encumbered by the tariff war.
US crude exports to China appear set to slow dramatically in September, with vessel-tracking data compiled by Thomson Reuters Oil Research and Forecasts showing about 6.12 million barrels, or about 204,000 b/d, scheduled for arrival. This would be down from around 363,000 b/d in August, and would also be the weakest month since March this year.
However, the pricing of the various grades of crude oil rather than impending tariffs explains why China stocked up on US crude in August, and appears to have backed off in September, and probably October as well. The discount of front-month WTI crude oil futures to Brent futures widened to $11.39 a barrel on June 6th and traded close to level for around a three-week period from late May to mid-June. May-June was the time that oil for September-October import into China would have been purchased.
Chinese refiners could buy WTI last spring at a substantial discount to Brent in the paper market, which would allow them to take physical cargoes. However, by the time September cargoes for China would have been purchased, the numbers had moved in the other direction, with Nigeria’s Bonny Light trading at $73.52 a barrel on June 25, putting it at a discount of $1.47 to WTI Houston. This price shift would have made buying West African light crudes more attractive than cargoes from the US even without the political considerations.
China’s near-desperate need to reduce the burning of coal which is poisoning the atmosphere of nearly all its large cities was highlighted last week by a new study showing that chronic exposure to air pollution could be linked to the cognitive performance of the Chinese people. Researchers believe that the negative impact of air pollution increases with age, and affects men with less education the worst. The results have global relevance, with more than 80 percent of the world’s urban population breathing unsafe levels of air pollution.
For now rapidly increasing the use of natural gas in China’s cities seems the only short-term fix for the pollution problem. PetroChina is aiming to grow its gas output at a much faster rate than oil over the next five years, however, “Domestic oil and gas resources are not good enough for significant production increases,” according to Zhang Jianhua PetroChina’s vice chairman. So far Beijing has not added LNG to the list of US exports targeted for tariffs.
The government is becoming increasingly concerned about the demographic slide which will leave a country of retirees being supported by fewer and fewer workers. Beijing now appears poised to scrap the limit on the number of children couples can have., A state-run newspaper has cited a draft civil code that would end decades of controversial family planning policies including fines and forced abortions. A new population policy would not have an impact for at least two decades by which time China’s economy and its demand for energy are likely to have changed radically.
For many years now a bill has been winding its way through the Nigerian legislature that would bring about a comprehensive reform for Nigeria’s perennially troubled petroleum industry. Last week President Buhari refused to give his consent to the Petroleum Industry Governance Bill (PIGB) and has returned it to the Senate. Given the current impasse between the executive and legislative arms of government, this bill will not be revived for the next two years. In the meantime, Nigeria’s petroleum industry will continue to be incredibly corrupt and is unlikely to make much progress in increasing oil production.
The Nigerian National Petroleum Corporation wants to build two condensate refineries with 200,000 b/d refining capacity. While the initiative would increase the NNPC refining capacity from 445,000 b/d to 645,000 b/d, its current refineries are only operating at a fraction of their rated capacity due to lack of maintenance. The company would be far better off in getting its existing refineries fully operational again before it undertakes to build new ones.
There was not much good news last week. PDVSA says it will increase oil output by 640,000 b/d by bringing in seven service companies to raise production from existing wells. Despite the claim that “a new era” has arrived for the company, it seems more likely that production will continue to decline. Last week a ship-handling accident at the PDVSA’s main export terminal shut down one-third of its capacity for an indeterminate period. The closing of the dock could delay as much as 5 million barrels in crude deliveries to Russian company Rosneft, further complicating Venezuela’s oil-for-loans agreements with Moscow. Shipments to the US’s Valero and Chevron are also delayed.
Under a contingency plan, oil tankers that were assigned to load diluted and upgraded crudes at the damaged dock are being diverted to a neighboring terminal. However, only ships carrying under 500,000 barrels can be accommodated at the smaller terminal.
As could be expected, PDVSA filed an appeal requesting that a Delaware court vacate a decision on Aug. 23rd granting Canadian miner Crystallex the right to seize the company’s US assets including the Citgo refineries.
6. The Briefs (date of the article in Peak Oil News is in parentheses)
Petro-dollar war: The main front where the future of the dollar will be decided is the global commodity market, especially the $1.7 trillion oil market. In the midst of America’s economic euphoria, it is worth remembering that one of every four people on the planet lives today in a country whose government is committed to ending the dollar hegemony. (8/28)
Offshore Norway, Equinor has raised the resource estimate for its giant oil field Johan Sverdrup in the North Sea and said it was able to drive development costs for the project further down. The estimated recovery for the entire Johan Sverdrup field is raised to 2.2-3.2 billion barrels of oil equivalent (up 0.1 bboe). The first phase of the Johan Sverdrup project is slated to start production in November 2019 and will be the main contributor to Norway’s rising oil production until 2023. (8/28)
In German coastal waters, construction work for Nord Stream 2, the planned Russian gas pipeline to Europe, has started, despite the threat of sanctions from US president Donald Trump and condemnation from across the EU. The contentious pipeline, which will double Russian gas imports to Germany across the Baltic Sea and reduce shipments through Ukraine, has heightened geopolitical tensions between Europe, the US and Russia, souring relations between Berlin and Washington and highlighting the EU’s fractured stance towards Moscow. (8/31)
Offshore Australia, ExxonMobil said on Monday it had commenced an $88 million offshore exploration drilling off the country’s southeast coast to search for new sources of natural gas. ExxonMobil Australia is also actively considering a potential gas import project to bring additional supply to the country’s east coast market. (8/27)
Brazil’s Petrobras and France’s Total on Friday agreed to buy millions of barrels of oil from the Brazilian government. It was the country’s first successful auction of its share of output from the pre-salt offshore play. The auction was the second attempt to sell its share of oil from three fields in the Santos offshore basin. The first attempt in May yielded no bids. (9/1)
In Brazil, investing $8 billion in waning offshore Campos Basin could boost its oil production by 230,000 barrels of oil equivalent per day (boepd) by 2025, consultancy Wood Mackenzie said. Production in the Campos Basin, where activity began about forty years ago, has fallen by a third over the last seven years to 1.3 million boepd, raising the specter of hefty outlays to close down operations. (8/28)
Onshore Colombia, six mostly foreign companies have so far made bids to explore for oil in 21 areas—many of them new—under a new system that seeks to boost investment and find new deposits to increase the nation’s reserves. (9/1)
In Mexico, a document drafted by advisors to incoming Mexican president Andres Manuel Lopez Obrador proposes withdrawing Mexico from the International Energy Agency and moving closer to OPEC. (8/30)
Mexico’s president-elect Andres Manuel Lopez Obrador will reportedly suspend oil auctions for at least two years, with some experts believing that his administration won’t hold any new oil auctions at all during his six-year term. He has also vowed to review the 107 contracts already awarded to companies through auctions over the last few years to check for corruption, although he has said he would not try to invalidate them so long as they check out. (8/27)
To Mexico, new pipeline capacity additions on both sides of the border have helped US natural gas pipeline exports to jump to their highest level on record in July, with a number of pipelines expected to become operational by 2020. For the U.S., more pipeline takeaway capacity gives the Permian an additional export outlet from West Texas to Mexico as producers are looking at ways to ease pipeline constraints on booming natural gas production. For Mexico, natural gas imports help to meet its rising gas demand as the country is adding gas-fired electricity generation capacity at a rapid clip while it faces a decline in its domestic gas production. (8/27)
A Canadian court on Thursday overturned approval of the Trans Mountain oil pipeline expansion, ruling that Ottawa failed to adequately consider aboriginal concerns, putting the future of the C$7.4 billion ($5.71 billion) project in jeopardy. The decision is a blow to Prime Minister Justin Trudeau’s government, which agreed in May to buy the pipeline from Kinder Morgan Canada for C$4.5 billion, and to the country’s oil sector. (8/31)
In Canada, with one surprise court ruling Prime Minister Justin Trudeau faces the risk of contesting next year’s election with key pieces of his economic and environmental plans in ruins. The Federal Court of Appeal overturned on Thursday the Liberal government’s 2016 approval to expand Trans Mountain, a critical pipeline to link Canadian crude with foreign markets, followed hours later by Alberta’s tit-for-tat withdrawal from Trudeau’s climate plan. The day’s events amplified criticism that Trudeau has failed to produce a regulatory system in which oil pipelines stood a chance of approval and undermined the PM’s ambitions to reduce emissions. (9/1)
The US oil rig count grew by two last week to 862, the first increase in three weeks, according to energy services firm Baker Hughes. Drilling has steadied over the last three months; the oil rig count rose by one in August after gaining three rigs in July and losing one in June. (9/1)
In Alaska, crude oil output on the North Slope could increase by as much as 40 percent in the next eight years. Fewer bureaucratic barriers and recent technology advancement continue to make the North Slope popular among oil exploration operators. Alaska has the infrastructure for oil production. The oil lurking under the surface of the historically oil-rich region is enough to turn the state’s economy around and reinstate it as a major player in the oil industry, according to new research from IHS Markit. (8/28)
In Wyoming, oil companies looking for the next big find are wading into the Powder River Basin, where pipelines are not congested, and land is cheaper than in Texas’ Permian Basin, the world’s fastest-growing oil-producing region. A series of largely undisclosed land deals is fueling interest in its conventional and shale formations. (9/1)
The earthquake link: In a new study in the journal Science, scientists describe for the first time how earthquakes can be triggered so far away from wastewater injection wells. That efficient practice by the oil and gas industry is creating a ripple effect far beyond its drilling locations. Geologists have linked injection wells to quakes, with findings based on years of observation. Human-made earthquakes, however, are mostly moderate in size, but put 1 in 50 people in the United States at risk, according to a recent U.S.G.S. analysis. (8/31)
Colorado voters will decide in November whether to increase land setbacks from new oil and gas development, a measure that could sharply limit future production from the DJ Basin. The setbacks would have the biggest impact on Weld County northeast of Denver, the most prolific production area in the state. Colorado is the seventh top oil-producing state and sixth top natural gas producer. (9/1)
Trump trumped in CA: Earlier this week, the California State Assembly passed SB 884, a bill that would prohibit the States Lands Commission from allowing any new wharfs, piers, pipelines and other facilities in state waters from the shoreline out to three miles offshore that could be used to expand oil production, effectively blocking Trump’s plans to drill for oil in federal waters off the California coast. (8/31)
California legislators scored a win against the Trump administration by passing one of the nation’s most ambitious clean energy bills. The bill, introduced last year by Sen. Kevin de León, D.-L.A., increases the state clean energy target from 50 percent of the state mix by 2030 to 60 percent and moves the target to 100% by 2045. (8/30)
US gasoline prices, as well as demand, remain high for the Labor Day weekend, the US EIA reported on Friday. The US average retail price for regular gasoline, reported on Aug. 27, was $2.83 per gallon, the highest it has been the Monday before Labor Day since 2014 — when it was $3.45 per gallon. (9/1)
EV support: By a unanimous vote, California lawmakers approved Assembly Bill 2127, as amended, that calls for a biannual update on electric vehicle charging infrastructure. The bill mandates the review to gauge progress on a state-wide effort to put at least 5 million zero-emission vehicles on California roads by 2030. (8/28)
Sales of battery electric vehicles and plug-in hybrids in Europe jumped by 42 percent annually in the first half of 2018, hitting the 1-million milestone, with the plug-in share of the European light vehicle market at 2 percent, data compiled by sales database and analytics firm EV-Volumes showed. The sales of battery electric vehicles (BEV) and plug-in hybrids (PHEV) in Europe came in at 195,000 units in the first half of this year. (8/28)
In Europe, the car market is also softening as demand returns to pre-recession levels. That is making profits harder to come by in a region where many car companies have long struggled to make money. President Donald Trump’s trade policies are undermining consumer confidence in many markets outside the US and are widely seen as the biggest threat to continued economic growth. (8/28)
Russian EV? Well-known arms and military equipment giant Kalashnikov—perhaps best known for its AK-47 assault rifle—took the world of cars by surprise last week, unveiling what it says will rival Tesla: an electric vehicle that can go 220 miles on a single charge. Critics note that the CV-1 is an ugly retro-design and that Kalashnikov hasn’t yet let observers look under the hood. (8/27)
Coal consumption continues dropping: The US EIA reported that the nation’s power sector consumed 661 million short tons of coal last year, the lowest level since 1983. (8/30)
Wind energy player: The US would be key to Ørsted’s efforts to grow its global footprint. The company has installed about 25% of the installed offshore-wind capacity in the world. Earlier in August, Ørsted made its first major investment in the US when it agreed to buy Lincoln Clean Energy LLC, a Chicago-based onshore wind, and solar company, for $580 million. Bidding for capacity in the US is next on the agenda. (9/1)
Since China has tapped all of its near-shore capacity for wind, Norwegian certification body DNV GL said it would help China develop additional power resources offshore. Huadong Engineering Corp. has contracted DNV GL to provide technical training and feasibility studies for an offshore wind farm. (8/30)
Aussie H2? Australia, one of the world’s top LNG exporters, has a bright future as a hydrogen economy. This is the conclusion from the Commonwealth Scientific and Industrial Research Organization, a federal agency that has, with a new roadmap, joined a growing interest in hydrogen as a renewable alternative to fossil fuels. (8/31)
Ultra air pollution: The Pacific Northwest, sandwiched between Canada’s smoldering British Columbia to the north and six fire-wracked Western US states, is feeling the side effects of one of the worst fire seasons on record. For much of the past several weeks, clouds of choking smog have upended daily life and posed a health hazard for millions here. (8/30)
When heat really hurts: A recent meta-analysis of 60 prior studies showed that unstable temperatures tend to be correlated with conflict. In the US, for example, there is good evidence that road rage, domestic assault, and murder are higher during heatwaves. (8/31)
Tankers with sails? In the 1980s, French ocean explorer Jacques-Yves Cousteau commissioned the Alcyone which used turbo-sails that provided thrust in the direction of travel along with the engines. Shipping executives said similar efforts didn’t catch on with tanker operators because either the costs of such technologies were too high or tests didn’t yield the expected fuel savings. But modern, lightweight and relatively cheap rotating sails show more promise. The cylinders on a Maersk tanker are made with composite materials by Finland-based Norsepower Oy Ltd. and cost 1.2 million to $2.3 million to fit on a vessel, depending on the size of the ship. (8/31)