Quote of the Week

“Hopefully we won’t see the continued exodus of quality workers and equipment from the Gulf.”

Matt McCarroll, Fieldwood Energy CEO, commenting on a “new attitude” toward US Gulf of Mexico operators among federal government regulators and the White House. (5/5)

Graphic of the Week

Contents

1.  Oil and the Global Economy
2.  The Middle East & North Africa
3.  China
4.  Russia
5.  Venezuela
6.  The Briefs

1.  Oil and the Global Economy

Oil prices continued to climb last week and are now up nearly $8 a barrel in the past month with NY futures at $69.72 and London $74.87. US oil futures are now at their highest in more than three years, as global supplies remain tight and the market awaits new US sanctions against Iran which seem likely to be imposed later this week. According to the EIA, US domestic oil production continues to climb — up by another 33,000 b/d the week before last — and US drillers added nine oil rigs to the count last week.  Thus the struggle between increasing US shale oil production and deteriorating geopolitical situations around the world continues.

The US-Iran sanctions crisis is the top of the list at the minute, but further deterioration of Venezuela’s oil exports and the possibility of a US-China trade war are not far behind.  Then there are the wars in Yemen and Syria which could morph into a threat to Middle Eastern oil exports.  All of these suggest that higher oil prices are on the way and cannot be stopped by growing production from one US oil basin.

As oil prices rise, up nearly $8 a barrel in the past month, observers are starting to ask questions as to when demand destruction will set in.  At least one financial manager is drawing attention by talking about $300 oil a situation which is unlikely to happen.  Should prices ever get to this level, we would be looking at gasoline above $10 a gallon in the US and demand would plummet as it did in 2008 with oil at $140.  Between 2007 and 2009,  US petroleum product consumption fell by about 3 million b/d.

The IEA currently is forecasting that the global demand for oil will increase at around 1.5 million b/d annually in 2018 and 2019.  While this might be true with oil prices around $60-$70, it is virtually certain that demand will drop if prices get back into three-digit territory.

The OPEC Production Cut: While the two key proponents of the production freeze, Saudi Arabia and Russia, continue to talk about extending the deal into 2019, changes which could mean the end of the cut are coming into view.  Russia pumped more than its quota under the deal for two months in a row, citing production contracts as the reason for the over production.  Thanks mainly to Venezuela and Angola, OPEC’s production in April slid to a one-year low of 32.0 million b/d, down about 140,000 b/d from March.

The April figure is about 730,000 b/d below OPEC’s notional ceiling of about 32.73 million b/d when every country’s quota under its production cut agreement is added up.  OPEC production was last lower in April 2017 at 31.85 million b/d, the last month before African Equatorial Guinea became the group’s newest member.

With the global oil inventory surplus nearly eliminated and prices moving up sharply due to geopolitical concerns, the only reason to hold the production cut at current levels, rather than eliminating it or reducing it gradually, is the desire to return to much higher prices to relieve the economic problems oil exporters have had in recent years.  Much higher prices are likely to slow demand.

Another issue is whether OPEC and Russia are in a position to increase production very much in the near future.  Moscow may be producing close to flat out even with production cuts in place.  The Russians based their share of the cut on a surge in production just before the cuts started. With China’s voracious appetite for oil, Moscow can send it all the oil it can produce.  The Saudis are producing well below their highs, raising the question of how quickly they could resume higher levels of production.

US Shale Oil Production: The optimistic hype about the future of US shale oil production continues to roll on.  Well productivity continues to grow thanks to longer horizontal laterals and the use of more fracking sand.  Rystad Energy says the average full-cycle breakeven costs in the Permian now are down to $42 per barrel and $48 when you throw in exploration costs.  Some are skeptical of figures like these as the new technology wells must be more expensive to drill and frack than shorter ones that used a lot less sand and fracking fluids.  The growing backlog of drilled but uncompleted wells is a symptom of this problem.

These claims of lower production costs are being made despite evidence that the “new technology wells” do not add to the ultimate amount of oil coming from the average well.  It just means that drillers are getting the oil out faster in the first few months, after which production drops more rapidly than a few years ago.  If the well costs considerably more to drill and frack, there is little if any improvement in production costs.

Then there is still the problem of the price differential between oil sold in Midland and oil ready for delivery to refiners or exporters along the Gulf Coast. Midland WTI crude averaged a $8.25/barrel discount to Houston WTI crude in April, widening from a $2.82/b discount in February.  This discount has widened as Permian crude production is outpacing pipeline takeaway capacity.  Although new pipelines are being built, the problem will continue until well into next year.

2.  The Middle East & North Africa

Iran: President Trump is expected to pull the US out of the Iran nuclear agreement on May 12th.  Trump wants Iran to give up its missile programs and to stop supporting Shiites against Israeli and Saudi interests in Syria, Yemen, Gaza, and Lebanon. Iran’s foreign minister said last Thursday that US demands to change the 2015 nuclear agreement are unacceptable. “Iran will not renegotiate what was agreed to years ago and has been implemented.”

Assuming that the US announces the re-imposition of sanctions later this week, the question becomes what happens next and what are the implications, both short and long-term for oil prices and stability in the region.  China and Russia will not join the sanctions and will likely make efforts to undercut them by buying Iranian oil and taking other measures to reduces their effectiveness.  Europe likely will be split on supporting the sanctions but will have to go along in part because of their deep financial ties with the US.  Some believe that US sanctions with reluctant help from a few EU countries could reduce Iranian exports on the order of 400,000-500,000 b/d later this year.

Iran could retaliate against the sanctions, but, for domestic reasons, Tehran will likely revive its nuclear enrichment programs and may go so far as to hint it is starting research on nuclear weapons again. Renewed Iranian efforts to develop these weapons would likely have serious consequences for the region. The Saudis are saying that they will move to acquire nuclear weapons and the Israeli reaction could be violent.  While the immediate consequences of ending the nuclear treaty may only be a modest increase in the price of oil, the longer term outlook is likely to lead to serious consequences for the region and the global economy.

Iran’s crude oil exports reached a record 2.61 million b/d in April, according to the oil ministry’s news service, suggesting that Tehran is attempting to get as much oil as possible on to tankers before new sanctions are imposed.  The largest traditional oil customers of Iran—China, India, South Korea, and Japan—purchased more than 60 percent of the Iranian oil export cargoes last month with China and India alone purchasing 1.4 million b/d.

Saudi Arabia: The Kingdom seems to be pushing oil prices up to at least $80 a barrel this year, in contrast with its long-time role as a stabilizing force in global energy markets.  The Saudis were instrumental in driving oil prices up nearly 50 percent in the past year and said last week that they would like to see oil prices reaching up to $100 per barrel.

Riyadh seems to have discovered that it is easier to earn money through higher oil prices than by pumping larger amounts of oil. The Saudis need at least $85-$87 oil to balance their budget and to achieve ambitious and expensive plans for modernizing their economy.  The IPO for 5 percent of Saudi Aramco also needs high prices if it is to be successful.

The recent oil price increases have helped the Saudi economy bounce back in recent weeks. BMI Research reported last week that the economy could grow by 1.6 percent this year. However, the introduction of a new 10 percent VAT on private sector activity will be a drag. Last week, the Saudis also sold an $11 billion bond issue to cover funding needs for the year.  This is the Saudi’s fourth international bond sale.

3.  China

Reports from last week’s discussions in Beijing between the Trump administration and the Chinese seem to suggest that a trade war may be inevitable.  “These meetings could end up going into the books as a formalization of hostilities rather than as the basis for a negotiated settlement,” said Eswar Prasad, a US-based China expert.  Beijing and Washington are taking a hardline approach so that even if a solution is possible, it is likely to take months or even years to negotiate.

Washington is insisting that China cut its $337 billion-a-year trade surplus with the US by almost two-thirds over the next two years and not retaliate against any US trade actions. The administration also wants to end parts of Beijing’s ‘Made in China 2025’ strategy, which aims to establish a world-leading role for Chinese companies in several economic sectors.  Beijing is demanding that the US rescind its longstanding objection to treating China as a market economy within the World Trade Organization.  This could make it harder to hit back at unfair trade practices which have contributed to the rapid growth of the Chinese economy in recent years.

Due to rapid economic growth, new refining capacity, and declining domestic oil production, China became the world’s largest oil importer with average of 8.7 million b/d coming in last year.  An often overlooked geopolitical and economic consequence of this situation is that Beijing will undergo a massive transfer of capital to foreign oil producers. In the future, Beijing will become more reliant on oil from unstable regions, including Iran, Nigeria, Saudi Arabia, and other OPEC producers, and from Russia which may look stable today, but it has morphed into a country with few stable institutions other than the security forces.

4. Russia

Moscow’s economy, which is nothing to write home about even in the best of times, is not doing well. Russia produces little in the way of exportable goods beyond oil and gas, military hardware, some basic agriculture and forest products, and some minerals. Compared to China and other developed countries it is a joke. The western sanctions stemming from the Ukrainian situation and the oil prices which are still way below the $110 level a few years ago have affected the economy for the worse. Hopes that the Trump administration would bring better relations and be a solution to their sanction problems seem to be fading and there is little on the horizon other than much higher oil prices which could stimulate economic revival.

This week, President Putin is being sworn in for another 6-year term and will be appointing a new cabinet. As part of this event, Putin is reported to be considering an effort to repair relations with the West which are at their lowest point since the fall of the Soviet Union. Rumors are circulating that he is considering appointing a close friend, Alexei Kudrin to a post in charge of new economic strategies and improving relations with the West. Kudrin is one of Putin’s oldest political associates and such an appointment could be a signal of compromise in the ongoing conflicts with the West over many issues. These range from the Crimea and sanctions, through support for Assad, to interfering with foreign elections.

Gazprom continues to ship unusually large amounts of natural gas to the EU despite disputes over pipelines, competition, and Ukraine. Natural gas coming via the 55  billion cubic meters/year Nord Stream 1 pipeline to Germany hit a record high of 51 billion cm in 2017.  While the EC has given Gazprom permission to bring more gas into Europe via the Nord Stream 1, the EU except for Germany is opposed to Gazprom’s planned 55 billion cm/year Nord Stream 2 project, due onstream at the end of 2019. As North Sea gas runs out, many in the EU are worried about becoming too dependent on Moscow for vital energy.

5. Venezuela

The Financial Times recently headlined a story by saying that “ Venezuela’s oil decline reaches new depths.” Managers at PDVSA are quitting, theft has increased, and workers shout in company cafeterias that the major general now in charge of the firm should go. Even the Chinese and Russians who are owed billions by the floundering company agree.  International oil companies partnering with PDVSA such as Total and Chevron are worried that Venezuelan oil production could fall by another 500,000 b/d this year, pushing up oil prices still further. Should the company collapse completely, the drop in global oil output would be bigger than last year’s  OPEC+ production cut.

Rafael Ramirez who ran PDVSA from 2004 to 2014 says that company is close to total collapse and expects oil production to drop by 600,000 b/d each year due to lack of investment.  Ramirez is currently hiding out in Europe to avoid prosecution in Venezuela on “corruption charges.” He says that incompetent managers with no experience in the oil industry are the root of PDVSA troubles.  He sees the only solution for Venezuela is to turn the firm over to the international oil companies that are currently operating in Venezuela and have the capital and management skills to turn the firm around.

The International Monetary Fund is threatening to bar Venezuela from voting on IMF policies after it failed to provide the IMF with data about its current economic situation.  Venezuela is obligated under its treaty with the IMF to provide data “on the operations of the social security institute and on exports and imports of merchandise, in terms of currency values, according to countries of destination and origin.”  Given the situation and the pace of inflation in Venezuela, it is doubtful that the government has any meaningful data to supply the IMF.

6.  The Briefs (date of the article in Peak Oil News is in parentheses)

Offshore competitive: The current tailwind in the oil market is likely to propel 100 new offshore projects to be sanctioned in 2018, according to Rystad Energy. This compares to only 60 projects in 2017 and below 40 in 2016. These projects represent a collective $100 billion worth of capital investment, giving an average of about $1 billion per project. In contrast, the average projected CapEx for offshore projects approved in 2013 was $1.8 billion. (5/3)

Deepwater discipline: Even though Brent Crude prices hit $75 a barrel last week, Shell continues to stick to disciplined spending and wants deepwater projects to break even at $40 a barrel or lower—a sign that Big Oil is committed to not repeating past mistakes with lavish expenditure on complex projects, as the case was when oil prices were above $100 a barrel. (5/2)

Norway’s Statoil said it aims to cut its carbon footprint more aggressively as measures to reduce global warming could reduce the value of its assets, leaving some of its reserves stranded underground. (5/5)

In the U.K., hybrid cars that rely on traditional engines, such as the Toyota Prius, would be banned by 2040 under clean-air plans being drawn up by the UK government that would outlaw up to 98 percent of the vehicles currently on the road. (5/5)

Saudi Arabia is apparently eager to adopt blockchain technology in its oil industry. It is looking at use of a supply management and smart contracts application specially developed for the oil industry. Basically, the app involves large-scale automation, tracking of every barrel produced through smart contracts, and securing payments. (5/4)

Sudan’s prime minister acknowledged his country’s crisis of foreign exchange shortages and economic imbalances that have negatively impacted the economy. He said the government’s recent economic measures were necessary to avert an overall economic collapse. Since March, Khartoum and the rest of the country have suffered a shortage of diesel fuel, gasoline and cooking oil, which led to long queues at gas stations. (5/2)

The Cuban government has signed off on an environment license that could pave the way to drilling for oil onshore, an Australian energy company said. (4/30)

Mexico’s Pemex expects to close 2018 by producing 1.98 million b/d of crude oil, allowing it to achieve its annual production goal of 1.951 million b/d. The company said the construction of new shallow-water and onshore midstream infrastructure would allow for increasing Pemex’s production. Also, the reactivation of close to 200 onshore wells will allow Pemex to have a considerable production boost. The company’s 2019 production goal is 1.953 million b/d. (4/30)

Canadian provinces are getting much less in exchange for the oil and gas they produce now than in the past despite growing production, a new report by David Hughes has revealed. In Alberta, Canada’s top oil and gas producer, Hughes notes that oil royalty revenues fell from 80 percent of the total provincial revenues in 1979 to 3.3 percent in 2016. Over the same period, however, production of oil and gas doubled. (5/5)

In Canada, Suncor Energy Inc. is barreling ahead on the ramp-ups of the Fort Hills and Hebron oil megaprojects as its refining operations protect it from the pipeline shortages and lower prices that are slamming competitors. The megaprojects are coming online in the midst of a fierce battle over pipelines to haul away western Canadian crude. (5/3)

Vancouver sits less than 750 miles from the Canadian oil sands but it may as well be on another continent for vehicle drivers. Gasoline prices in the Pacific Coast city hit C$1.62 a liter ($4.77 a gallon) on Monday, the highest in North America, according to GasBuddy. And there’s little sign of reprieve with a weaker currency, limited refinery supplies, and a new carbon price behind the surge. (5/2)

The US oil rig count grew by nine, bringing the total count to 834, and the gas rig count increased by one, according to Baker Hughes. (5/5)

LNG exports: US liquefied natural gas company Cheniere Energy said on Friday it planned to make a final investment decision to build the third liquefaction train at its Corpus Christi LNG export facility in Texas in the next few weeks. Cheniere also said construction of three other 0.7-billion cubic feet per day liquefaction trains was ahead of schedule with Sabine Pass 5 in Louisiana and Corpus Christi 1 expected to enter service in the first half of 2019 and Corpus Christi 2 now expected in the second half of 2019. (5/5)

“Smart devices” cut labor:  The energy industry has turned to robots and drones to cut costs and improve safety in some of the world’s tougher working environments. Drones inspect gear high up on floating rigs. Robots crawl underwater to test subsea equipment for microscopic metal cracks. Remotely operated mini submarines can replace divers. (5/4)

Cybersecurity threat: Energy companies—including E&Ps, pipeline operators, and utilities—spend less than 0.2 percent of their revenues on cybersecurity, two security consulting firms have calculated. This compares with three times this portion of revenues spent on cybersecurity by financial services providers and banks. Last year, Deloitte reported that the energy industry was the second most popular target for cyberattacks in 2016. (5/2)

Jet-fuel costs hit airlines: Four months ago, several large air carriers said they were in no rush to start hedging against further price increases in crude oil and fuel. Now they may be regretting that decision. In its first-quarter report released yesterday, American Airlines said higher fuel costs had dented its revenues, increasing its expenses by $412 million, with the average fuel price 23.6 percent higher in the first quarter of 2018 from a year earlier. For the full year, AA may have to cough up an additional $2.3 billion in fuel costs if prices stay higher. Usually, fuel costs constitute almost a third of airlines’ total costs, (4/30)

Gasoline prices: There’s a good chance you’ll soon see regular gas selling for $3 a gallon. The national average price is up to $2.81 a gallon, according to AAA. (5/3)

Gasoline: prices vs. taxes. The US government forecasts that summertime gasoline prices this year will be at their highest level since 2014, but things could also be worse for the average US driver. The US federal gasoline tax was last changed in 1993, when it was raised to 18.4 cents/gal, but was not indexed for inflation. According to figures from the Brookings Institute, once adjusted for inflation, federal gasoline tax revenues peaked in 1994 and have been falling ever since. (5/3)

A heat wave in the middle of spring is poised to boost power plants’ demand for natural gas in the US Northeast to the highest in at least four years. Gas prices have been stuck in a narrow range for weeks as traders weigh a growing stockpile shortfall against record production. Inventories of the fuel are 29 percent below average after an unusually cold April, and a blazing summer could limit the amount of gas added to underground storage over the next few months, sending prices soaring. (5/4)

Cars sales in crisis: A bet by Japanese automakers that Americans still want sedans is turning out to be expensive. As Americans’ taste shifts toward sport-utility vehicles, Nissan’s US sedan sales fell almost 35% in April from a year earlier, driving an overall decline of 28%. Honda’s overall sales fell 9.2%, while Toyota’s dropped 4.7%. (5/3)

An NREL study focused on the technical potential for solar energy generation from the rooftops of low-to-moderate income households. The NREL study determined that the 33 percent target is easily technically viable among current LMI households. However, it is important to note that the study did not estimate economic viability. (5/3)

RE rebound? The US has moved ahead in EY’s Renewable Energy Country Attractiveness Index and is now second only to China, the UK consultancy said. Last year, the US was third from the top because of President Donald Trump’s fossil fuel industry revival efforts. Now, it seems these will not have any substantial impact on renewable energy even when taking into account the import tariffs on PV cells and modules introduced earlier this year. (5/4)

H2 trucks: Anheuser-Busch is reserving up to 800 of Nikola Motor Co.’s hydrogen-electric trucks, one of the largest orders so far for alternative-fuel vehicles as the company races with Tesla and other manufacturers to move trucking away from diesel-guzzling big rigs. The US subsidiary of Anheuser-Busch plans to use the vehicles for long-haul deliveries from breweries to its distributors starting in 2020. Nikola says it will build 28 hydrogen stations along the routes of the beer maker’s dedicated fleet. (5/4)

Hydrogen vehicles powered by fuel cells never really took off because the fuel cells were simply too costly to make. But a recent study by researchers from Kumamoto University found a way to extract hydrogen from ammonia without the release of noxious nitrogen oxides. They added a new compound comprising copper, silicon, and aluminum, which made ammonia combust at lower than usual temperatures, and it eliminated the release of nitrogen oxides. Theoretically, this method could produce energy from hydrogen in a much cheaper way than other existing methods. Until it’s scalable, this breakthrough remains in the potential stage. (5/3)

The main challenge with electric planes seems to have been striking the balance between weight, reliability, and cost. An all-electric plane would need a massive load of batteries—this is not only expensive but also has implications for the aircraft’s flight performance. Of course, there are also issues such as safety and range to consider. (5/1)

Floating nuke in 2019: Russia is moving ahead with this questionable plan.  If a Russian state-owned company has its way, remote regions of the world will soon see giant, floating nuclear reactors pumping power to port cities and drilling platforms. Once a barge-based plant is wired into the electrical grid in the Arctic town of Pevek in 2019, it will be the world’s northernmost nuclear reactor, capable of powering a town of 100,000 people with what its manufacturer, Rosatom, calls “a great margin of safety” that is “invincible for tsunamis and natural disaster.” But environmental groups have other names for the barge: “Nuclear Titanic” is one. Another is “Floating Chernobyl.” (5/2)

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