Quotes of the Week
New discoveries from conventional drilling are “at rock bottom. There will definitely be a strong impact on oil and gas supply, and especially oil.”
Nils-Henrik Bjurstroem, manager with Oslo-based consultants Rystad Energy
“…seriously, there is no exploration going on today.”
Per Wullf, CEO of offshore drilling company Seadrill Ltd.
Graphic of the Week
1. Oil and the Global Economy
2. The Middle East & North Africa
7. The Briefs
1. Oil and the Global Economy
The struggle between fundamentals and speculators’ dreams of much higher prices continued last week with oil futures falling through Thursday and then rebounding on Friday to close at $44.44 in NY and $46.83 in London, down about $2.50 for the week. The fundamentals include growing stockpiles, increasing US and Canadian rig counts, and fears that US interest rates will be going up shortly which will lead to a stronger dollar and lower oil prices.
Despite a low-price-inspired boom in US gasoline consumption this summer, global demand for more oil has not been strong. China’s economy and the economies of its suppliers, which have been the main impetus for increasing oil demand in recent years, are clearly slowing. Despite the apparent “peaking” of Chinese domestic oil production and its increasing reliance on imports, the slowing Chinese economy will be one of the major factors in the demand for oil in the immediate future. Much of the increase in Chinese oil imports earlier this year has simply been turned into oil products and exported into already saturated oil product markets. This does little to achieve balance in global supply and demand.
For months now the talk about a “production freeze” has been a major factor in pushing prices off the lows seen last winter. Naturally, all of the major net oil exporters want to see a return to the boom years of $100+ oil prices. However, none want to cut or in a few cases limit future growth if it seems possible. Several major producers, including Russia, the Saudis, and the smaller Gulf Arab states, do not seem to have any prospects of growing their production much further. Others such as Iran and Iraq can see significant increases in oil output in the years ahead and have little or no interest in putting a cap on this potential growth. Several countries including Venezuela, Nigeria, and Libya for one reason or another are pumping well below their normal capacity and have no interest in freezing output at ruinously low levels.
All the oil exporters seem to have figured out that by giving lip service to the possibility of a freeze they can drive prices $10 a barrel or more higher simply by hinting that they might be willing to enter into a production freeze agreement. With global oil production well above 90 million b/d, a $10 price increase means nearly a billion dollars per day revenue increase for oil exporters at the cost of a few words leaked to the press by some oil minister or other. Last week we had the Russians, Saudis, and Iraqis all talking about the possibility of coming together on an as yet undefined production freeze. The meeting to sort this out will be held in Algiers in about three weeks. In the meantime, most analysts are skeptical that given the conflicting interests, any meaningful agreement that will cap or lower production enough to bring supply and demand back into balance and to eat away at the massive stockpiles can be reached.
OPEC’s production increased by 40,000 b/d in August to a recent record of 33.5 million b/d. Increased production from the Saudis, who hit a record of 10.7 million b/d, Kuwait, the UAE, and Iraq offset lower production in Nigeria and Venezuela. Iran and Iraq are still making major efforts to increase production and Nigeria has the prospect of increasing its production by 700,000 b/d or more simply by reaching agreements with the new generation of insurgents that have been shutting down their oil production. Shell Oil’s chief energy advisor said last week that the oil markets might not rebalance until the end of next year as some 1.5 million b/d could return to the markets if the Libyan and Nigerian situations are settled.
Looking at the longer term, the release of a report last week by Wood Mackenzie pointing out that new oil discoveries are now at a 70-year low and that very little is being spent finding more has caused much discussion in the financial press. It is these numbers that motivate speculators to jump on every upward price move as the beginning of a trend that will lead to much higher prices in the next decade. Whether much higher oil prices can be absorbed by the world economy or whether there will be a significant shift to cheaper sources of energy remains to be seen.
2. The Middle East & North Africa
Iran: Tehran is still insistent that it will not be part of any OPEC production freeze until it achieves its “rightful share” of the oil markets and recovers from the years of international sanctions. Even Russia, Iran’s new-found friend, was careful to say last week that while it was willing to enter into an oil freeze agreement, there would have to be an exception for Iran. It is Iran’s push for a higher market share that is seen as the major impediment to a meaningful production freeze agreement.
In the meantime, Tehran is still trying to entice the international oil companies into investing billions in Iran and increasing its oil production by millions of barrels per day. The South Azadegan oil field on the Iraqi border is the first one designated to increase production under the new oil contracts which will be bid on next month. The China National Petroleum Company had been contracted to develop this field for the Iranians several years ago, but the Chinese never followed up on the contract which was torn up for lack of performance. Developments such as these raise the questions as to just how much foreign interest there will be to invest in a country which is torn by internal dissent at the highest levels and where the ostensible government has serious limitations on its powers.
Syria/Iraq: The situation in Syria continues to become more complex as Turkey launches attacks into the country to retaliate against ISIL attacks inside Turkey and to prevent the Kurds from establishing a Kurdish state in Syria that could support Kurdish separatists inside Turkey. The pressures on ISIL’s capital in Syria and the Iraqi city of Mosel continue to grow. Attention is focusing on what happens after ISIL no longer holds significant territory and the numerous groups opposing it turn on each other. Given the massive amounts of proxy foreign support flowing into the conflict, the fighting seems destined to continue indefinitely.
Iraq increased its oil exports to a four-month peak in August by agreeing to let part of the production from the Kirkuk oil fields, which are under the control of the Iraqi Kurds, export oil through Kurdistan to Turkey. Talks are underway to settle the longstanding revenue-sharing dispute between Baghdad and Erbil.
Last week Iraqi Prime Minister Al-Abadi surprised the oil markets by announcing that Baghdad would support an oil output freeze at the Algiers meeting. This would seem to be a reversal in policy as Iraq is working hard to increase oil production and exports. Whether this is anything more than talk to drive up oil prices remains to be seen. So long as Tehran is opposed to any freeze on its production, nothing meaningful is expected to come from the talks. While there may be an occasional bounce in Libya’s oil exports, the possibility of sustained production above 1 million b/d still seems remote.
Libya: Now that the Islamic State has been reduced to a couple of neighborhoods in Sirte, the problem is what comes next. Most of the militia fighting in Sirte come from Misrata and it is not clear that they will be willing to accept the authority of the new UN-backed government in Tripoli. With three separate governments and a rogue army commander running around, each with their own agendas, the possibility of any unity seems remote.
Last week the Saudis appeared to tilt the balance in favor of some freeze agreement coming out of the Algiers meeting when the Saudi Foreign Minister said that it would be reasonable for the Kingdom to go along with a common position in making changes to oil production. The Saudis also said they will maintain a responsible oil production policy and not flood the markets with oil prior to the Algiers meeting to establish a higher level at which to implement a freeze. The Kingdom’s Energy Minister noted during an interview that Saudi Araba now has the capacity to produce 12.5 million b/d.
Beijing’ apparent oil demand in July fell to an 11-month low of 10.75 million b/d – down 6.9 percent from June and a year over year decline of 5.4 percent. Oil product exports in July were a record 860,000 b/d, adding to the theory that China is oversupplied with oil and needs to cut back. The Chinese statistical bureau attributed the decline in oil consumption to hot weather and flooding which affected some 60 million people during July.
In a rare release of information about the state of its strategic reserves, Beijing reported that as of mid-year they were at 234 million barrels and had grown by 43 million barrels since the middle of 2015. The report says that China distributed the reserve crude among seven tank farms and one underground storage cavern. This suggests little progress in expanding strategic storage sites and that some of this year’s increase is being held in commercial storage.
China has boosted its imports to 7.5 million b/d this year, partly due to a decline of high-cost domestic production at some fields. This decline coupled with the rapid increase in strategic reserves has accounted for the rapid increase in imports despite lackluster economic growth. The lack of regular reports on the size of China’s strategic reserves has led to a debate among analysts as to what will happen to Chinese demand in the second half of this year. JPMorgan believes that China has little space left in which to store strategic reserve crude and will cut imports by 1.2 million b/d in the second half adding to the world oil glut. Others believe the situation is not so bad and that Chinese imports will only fall 100,000 b/d this year.
Over the weekend, the US and China agreed to implement the Paris climate change pact accord. China is already suffering from a near-existential air quality problem and has been taking numerous steps to reduce coal consumption. China is facing a massive closure of small thermal power plants as the government plans to cut back on excess steel making capacity. This decline would eliminate the customer base that has kept many of the smaller thermal power plants in business.
Concerns are rising about the long-term health of China’s economy which will play a major role in determining the demand for oil in the next decade. Beijing has done a good job in stabilizing its economy after years of deficit-financed growth, but in recent months there has been little sign that the situation is improving and some are worrying that the current stimulus measures are not working and that harder times are ahead.
The major news last week was Moscow’s backing of a possible OPEC production freeze deal so long as Iran was allowed to increase its output to pre-sanction levels. Whether this will sit well with the Saudis, whose animosity against Tehran is steadily increasing, remains to be seen. Even Russia’s East European oil markets are being threatened by increasing Middle Eastern oil markets. Russia has long had a lock on European markets, but given the Ukrainian situation, may EU countries would like to diversify their sources of energy supply away from complete dependence on Russia.
Oil production remains at about 1.5 million b/d, down by 700,000 or more b/d since last year. One of the major outages has been the Forcados oil terminal which was blow up six months ago. A report last week says that repairs to the damaged line are nearly complete and that it is will be ready to go back into service in about two weeks. The Niger Delta Avengers who have caused most of the damage to the oil pipelines say they have stopped their attacks and are ready to negotiate with the government over a better revenue sharing deal for the peoples of the Niger Delta. In the meantime, however, a new group calling itself the Niger Delta Greenlander is taking claim for a recent attack on a pipeline operated by the National Petroleum Development Company. The group also issued a list of many other oil facilities that it plans to attack.
On Thursday the opposition organized the largest demonstration yet against President Maduro. On Saturday, the President was run out of town by an angry mob banging on pots and pans and screaming that they are hungry. Recent polls show the president would lose a recall election, but Maduro’s allies are trying to move the recall election into 2017 at which time Maduro would only be replaced by his Vice President for the remainder of the six-year term.
Some analysts are seeing the growing hunger-fueled political unrest as a harbinger of a complete political collapse that could halt oil exports. Oil production was about 300,000 b/d lower in June than last year. Given domestic requirements and the need to repay multi-billion dollar loans from China, the country only has about 900,000 b/d available for export, which given the current selling price of about $40 per barrel for its heavy oil, is not enough to support needed imports.
Venezuela’s international reserves are now about $12 billion, and bond payments of $5 billion are a coming due later this year and another $5 billion in the first half of 2017. The credit default markets are saying that there is a 91 percent chance that Venezuela will default on its bonds within the next five years.
7. The Briefs
Explorers in 2015 discovered only about a tenth as much oil—2.7 billion barrels—as they have annually on average since 1960, and the lowest amount since 1947, according to consulting firm Wood Mackenzie. This year, they’ll probably find even less, spurring new fears about their ability to meet future demand. With oil prices down by more than half since the price collapse two years ago, drillers have cut their exploration budgets to the bone. (8/30)
The huge global oil oversupply that has weighed on prices for the past two years may not clear until the second half of 2017, said Shell’s chief energy adviser Wim Thomas. The potential return to the market of some 1.5 million barrels per day of supply from Libya and Nigeria and uncertainty about Iranian and Iraqi production levels could push a rebalancing further away than many in the oil industry are hoping. (8/30)
Dividend trap: The world’s biggest oil producers may struggle to make more than $40 billion in annual dividend payouts to investors as the worst crude collapse in a generation stretches into its third year. Without a recovery in oil prices from the current sub $50-a-barrel level, major energy explorers will have to increasingly cannibalize drilling budgets to ensure they have enough cash to cover dividend commitments next year. (8/31)
Offshore Norway, Wood Mackenzie estimated a $50 billion decline between 2016 and 2020 in investment in oil and gas projects on the Norwegian Continental Shelf (NCS) as companies defer and cancel projects to cut costs. More than 10 projects have been deferred or scrapped. (8/30)
BP CEO Robert Dudley said on Friday he expected global oil prices to remain at around $50 per barrel till the end of this year and at the same level or even a “little above” in 2017.” (9/2)
Russian energy company Gazprom’s CEO Alexei Miller met in Istanbul with Turkish leaders to review options for moving ahead with the gas pipeline project dubbed Turkish Stream. (9/2)
In Cyprus, major international oil companies have submitted bids to participate in the country’s third licensing round for three southern offshore blocks adjacent to Egypt’s northern waters. The three Cypriot licensing rounds have encountered a number of challenges. (8/30)
China’s SPR: From underground caverns by the Yellow Sea to a scattering of islands in the Yangtze River delta, the government has been stockpiling crude for emergencies in a network of storage sites dotted around the country. Record purchases this year by the world’s biggest energy consumer have helped oil prices recover from the worst crash in a generation. What the country plans to do next could determine where prices go from here. The difficulty is that nobody outside China really knows for certain. (8/31)
The first U.S. LNG shipment to China from the lower 48 states arrived last week, marking the official entry of the U.S. into the Asian LNG market. The Maran Gas Apollonia was the 19th cargo of LNG to load from the Sabine Pass export facility in the U.S. Gulf of Mexico, but the first to reach northeast Asia since the first loading in February this year. The cargo traversed the newly improved Panama Canal to reach China, and was the first LNG tanker to transit the newly expanded canal. (9/2)
The state of Victoria plans to ban shale and coal seam gas fracking in what would be Australia’s first permanent ban on unconventional gas drilling, citing the concerns of farmers and potential health and environment risks. However the government left the door open to allowing onshore conventional gas drilling after 2020. (8/30)
Chevron Indonesia Co. said it started natural gas production from the deepwater Bangka field, a project that has a design capacity of around 110 million cubic feet per day. The start of production comes roughly two years after drilling began. (9/2)
In Egypt, Royal Dutch Shell announced on Wednesday new natural gas discoveries in a concession area of north Alam El-Shawish in the nation’s western desert. The initial quantities discovered were estimated at about half a trillion cubic feet of gas with more possible reserves. (9/1)
Uganda expects three oil companies to invest $8 billion in the East African nation before they start producing crude in 2020. The government on Tuesday issued production licenses to London-based Tullow Oil Plc and Total SA of France and said that together with Cnooc Ltd., the state-owned Chinese producer, the country expects to pump as much as 230,000 barrels per day of crude. (8/31)
In West Africa, sustained Brent crude prices below $50 a barrel will dampen the prospects for new oil projects in the region. Angola, the continent’s biggest producer, has the lowest break-even price of $49.60 a barrel. Nigeria needs $81.80 a barrel to make a profit, while Gabon, Cameroon and Equatorial Guinea require between $70 and $80 oil. (9/1)
The focal point of global piracy is shifting to the Gulf of Guinea with a spurt of attacks in West African countries such as Nigeria even as the menace has ebbed in Asia and around the Gulf of Aden, shipping industry executives and insurance brokers said. (8/30)
Argentina is advancing in its mission to become the largest shale oil and gas producer outside of North America. But well economics still challenge the industry, despite heavy price supports from the government. While production from conventional wells in the Neuquén basin has steadily declined, tight gas production has almost tripled over the past two years with an average of 18 new wells drilled per month in the basin. But only outstanding wells break even at the incentivised US$7.50/MMBTU according to the latest Wood Mackenzie analysis. (9/1)
In Cuba, nearly two years after presidents Barack Obama and Raul Castro announced a thaw in relations, the island’s government is turning to foreign investors to boost renewable energy as it faces cutbacks in cheap oil imports from Venezuela. Cuba wants to get 24% of its electric generation from renewable resources by 2030. (9/3)
Canada’s economy grew at the fastest pace in three years in June, regaining momentum after Alberta wildfires led to the biggest quarterly contraction since 2009. (9/1)
The U.S. oil rig count climbed on in the past week to 407, Baker Hughes Inc. said. The nation’s gas-rig count rose by seven in the past week, to 88. The U.S. offshore-rig count fell by seven rigs from last week to 10, which is 23 fewer than a year ago. (9/3)
The U.S. imported 8.92 million b/d of crude oil last week, the largest amount in almost four years, according to preliminary data from the EIA. (9/1)
The U.S. average gasoline price at retail outlets was $2.24/gallon (gal) on August 29, the lowest price on the Monday before Labor Day since 2004, and 27¢/gal lower than the same time last year. (9/3)
U.S. total oil demand rose in June on a year-over-year basis for the fifth straight month, as record gasoline demand offset stale distillate sales, the U.S. EIA said. U.S. oil demand in June rose by 1.2 percent, or 242,000 barrels per day, from a year ago to 19.833 million bpd. (9/1)
U.S. motorists used a record volume of gasoline in June as good weather and cheap fuel encouraged a strong start to the summer driving season. The volume of gasoline supplied to domestic consumers averaged 9.664 million barrels per day, an increase of 273,000 bpd compared with the same month in 2015. Consumption beat the previous record of 9.640 million bpd set in July 2007. (9/2)
Permian strong: Oil wells in the biggest U.S. oil field remain profitable even when crude prices drop below $30 a barrel, said Pioneer Natural Resources Co. Chairman and Chief Executive Officer Scott Sheffield. For shale drillers such as Pioneer, “break-even” typically means operating costs plus a 10 percent or 15 percent return. (9/3)
North Dakota crude oil production is too low to support the development of the planned east-bound Sandpiper pipeline, Enbridge Energy announced. In its latest statement, Enbridge said new pipeline capacity was unnecessary in North Dakota and recovery was likely outside its five-year planning horizon. (9/3)
Pipeline pressure: A group of 31 environmental organizations sent a joint letter to the White House asking President Obama to halt construction of the Dakota Access Pipeline, a 1,168-mile oil pipeline that would connect Bakken oil to refineries in Illinois. The $3.7 billion project would carry 470,000 to 570,000 barrels per day of light sweet crude from North Dakota. (8/29)
O&G jobs lost: The United States added 151,000 jobs in August, though jobs in mining continued their decline. According to seasonally adjusted figures, the United States shed 4,300 mining jobs in August, bringing the total loss to 233,000 after peaking in September 2014. The number of job losses is lower than in recent months, but oil and gas companies are still reducing their workforces as the industry continues to grapple with the low price of oil. (9/3)
Oilfield services company Baker Hughes is implementing a pay cut to its employees as the industry continues to adjust to the low oil price environment. The company implemented “a temporary 5 percent pay reduction for certain U.S. employees during the last 14 weeks of 2016.” Affected employees will receive four additional paid holidays. (9/3)
Royal Dutch Shell agreed to sell its Brutus/Glider operation in the Gulf of Mexico for $425 million as Chief Executive Officer Ben Van Beurden seeks to resuscitate an explorer dinged by the lowest profits in more than a decade. The field pumps the equivalent of 25,000 barrels of oil a day, or 5.8 percent of Shell’s output in the Gulf of Mexico. (8/30)
Shell breaking ranks? During these hard times, oil majors can snap up unconventional producers and assets at low valuations. Not Shell. The Anglo-Dutch oil giant is increasingly turning away from oil and moving towards natural gas as an alternative. In the year 2000, 37 percent of Shell’s production was from natural gas. By 2015, that number had risen to 49 percent. For ExxonMobil, those figures were 40 percent in 2000 and 43 percent in 2015. (9/2)
Energy Secretary Ernest Moniz, at a hearing in Seattle, said that fracking has helped bring down CO2 emissions to their lowest in 24 years by enabling the displacement of coal with lower-emission natural gas. The secretary’s remarks come soon after the EPA published a study that claims fracking doesn’t pollute underground water, raising alarm among environmentalist groups and more notably, among EPA’s own science advisers, who lashed back at the authority with the argument that the researchers involved in the study did not have enough scientific evidence to support its claim. (8/31)
Coal consumption by educational institutions such as colleges and universities in the United States fell from 2 million short tons in 2008 to 700,000 short tons in 2015—down 64%. Consumption declined in each of the 57 institutions that used coal in 2008, with 20 of these institutions no longer using coal at all. (8/31)
China’s state-owned Shanghai Electric Power Co. plans to acquire a controlling stake (66.4%) in Pakistani power utility K-Electric Ltd., in a deal that could be one of the biggest foreign investments in Pakistan’s history. K-Electric supplies power to Pakistan’s largest city and economic hub, Karachi, home to around 20 million people. The company has a customer base of 2.2 million, and 11,000 employees. (9/1)
China General Nuclear Power Corp. has been indicted by the FBI on allegations that it has been trying to illegally acquire nuclear technology secrets from its U.S. consultants. (8/30)
To contain the nuclear disaster at the Fukushima Daiichi Nuclear Power Station in Japan, an underground wall of frozen dirt 100 feet deep and nearly a mile in length is being built to solve a runaway water crisis threatening the area. (8/30)
TX and renewables—the odd couple: On a blustery February night, the Texas electricity market hit a milestone. Nearly half the power flowing onto the grid came from wind turbines, a level unimaginable a decade ago in a place better known for its long romance with fossil fuels. The Lone Star state still embraces its oil and gas, leading a revolution in innovative “fracking” technology. Yet an equally startling energy bonanza here has gone almost unnoticed—the rise of renewables. (8/30)
Wind power is a natural complement to solar – wind often blows hardest at night and on stormy days – exactly when solar is the least useful. Yet for all of those advantages, wind power has simply never attracted the same fervor as solar has. That may be starting to change. While solar is very useful in some areas like California and Nevada, wind power simply makes much more sense in others. Recognition of that seems to be taking hold. (8/29)
Battery technology has reached a point where utilities are installing banks of lithium-ion batteries to help with peak demand. They also play an important part in smoothing out the variable nature of alternative energy. But batteries are not the source option; others include compressed air, flywheels, even an electric train run uphill with a heavy load that releases power when it brakes going downhill. So while batteries are not the only play, because Mr. Battery, entrepreneur Elon Musk, is a showman, they tend to get more public attention. (8/31)
World population will reach 9.9 billion in 2050, increasing by 33 per cent from an estimated 7.4 billion now, the latest report from the Population Reference Bureau has predicted. Very low birth rates in Europe will mean population declines there while Africa’s population is expected to double. (8/30)
Scotland’s First Minister Nicola Sturgeon launched a new independence drive on Friday, urging supporters to join the country’s “biggest ever political listening exercise” to gauge public appetite for a new referendum. (9/2)
European aviation giant Airbus is reportedly working on a flying driverless taxi that you can summon via an app on your smartphone. The concept itself is extraordinary enough – but Airbus’ equally extraordinary timeline shows that it’s serious. The company expects to have a prototype built and doing initial tests by the end of 2017. (8/29)