Quote of the Week
“This week, Georgetown University’s board voted to sell off its investments in coal, and Norway’s sovereign wealth fund, the largest pool of investment money in the world, announced it would do the same…Divestment won’t move Exxon Mobil directly — that’s impossible; the company is dug in, and someone else will simply buy the stock when it’s sold. But divestment will undercut the industry’s political power…Divestment is one tool to change the zeitgeist, so that the day arrives more quickly when the richest and most powerful can no longer mock renewable energy and play down climate change.”
–Bill McKibben, distinguished scholar at Middlebury College, founder of the group 350.org (in the Washington Post)
1. Oil and the Global Economy
2. The Middle East & North Africa
5. The Briefs
1. Oil and the Global Economy
Oil prices fell last week with New York futures closing Friday at $59.31 a barrel, down 1.9 percent for the week. London closed Friday at 63.31 down 3.4 percent for the week. The debate over whether prices will climb or fall in the short term continues, with optimists citing various bits of good news about the global economy and the falling US rig count to support their case. Pessimists cite the estimated 2 million b/d of global overproduction and expectations of increased exports from the Middle East as reasons prices will decline. Much of the decline last week was due to a stronger dollar occasioned by the ongoing Greek bailout crisis.
Another source of pressure on oil prices is coming from the unwinding of sea storage financial spreads. Last winter when prices were at their lowest, millions of barrels of oil were bought on the spot market and loaded on tankers to await higher prices already available in spring futures contracts. It is now time to sell this oil on the spot market, which is creating additional supply.
The EIA reported that US crude stocks fell by 1.9 million barrels the week before last, but much of this was simply turned into oil product inventory, which increased by 7.4 million barrels. The EIA, which does not have a very good hold on weekly US production, said US crude output was up by 20,000 b/d the week before last, but all this came from Alaska while lower 48 production remaining unchanged at 9.08 million b/d. Consultant Wood Mackenzie says USoil production will grow by 700,000 b/d during 2015 as compared with 1 million b/d increases in 2013 and 2014.
The OPEC decision to keep its output at 30 million b/d until at least next December essentially tells its members to produce as much oil as you can. As usual, opposition to the decision came from Venezuela, Angola, and Iran whose economies are hurting badly from the low oil prices and would like others to make production cuts so they can benefit from higher prices. These counties maintain that the new “fair price” for crude is $80 a barrel and that OPEC should cut production until prices reach this level. The same could be said for Texas where the economy and labor markets have been badly affected by major reductions in capital spending on oil production.
It is dawning on many market participants that that there is no “Minister of Shale Oil” in the US who can raise or lower production as is done in most oilexporting countries. In the US production decisions are made by dozens of producers, with different costs of production and financial strength. The continued willingness on Wall Street to finance unprofitable US oil companies, in hopes that they will one day become profitable and pay off their debts, is amazing many market observers.
New foreign trade data shows that US crude exports hit a record high of 586,000 b/d in April, which was 169,000 higher than in March. The bulk of this crude went to Canada, which took 492,000 b/d and is generally exempt from the 40-year old US crude export ban. Re-export of imported crude is also allowed. The mood in the Congress to repeal the export ban seems to be getting stronger with the chair of the House energy panel now backing repeal. Bills to repeal the ban now have 40 sponsors in the House and 13 in the Senate,
A philosophical split between US and European oil companies is growing. Last week the heads of Europe’s BG Group, BP, Eni, Shell, Statoil, and Total called on their governments and the UN to develop a carbon pricing scheme to increase the costs of emitting carbon into the atmosphere. The call was immediately denounced by Exxon and Chevron, who hold that carbon emissions are not responsible for climate change, and that carbon-pricing plans are unworkable. There is growing concern that the world’s governments are still unwilling to bear the costs of reducing carbon emissions so the goal of holding global warming to a maximum of 2o C. above pre-industrial levels will not be achieved in time to avert widespread devastation.
2. The Middle East & North Africa
The situation in the region continues to deteriorate with ISIL and its affiliates making political and military gains in Syria, Iraq, and now in Libya. The humanitarian situation is the region is reaching epic proportions with millions displaced across the region. There were no new direct threat to oil exports last week, but the long term outlook continues to deteriorate.
There was heavy fighting in Anbar province as ISIL attempted to drive Baghdad’s forces from their last major military base in the province. ISIL is starting to cut water supplies to those parts of Anbar occupied by government forces and is managing to mount nearly daily car bombings in Shiite towns and districts. Needless to say the humanitarian situation is getting still worse. Sunnis fleeing ISIL in Anbar are being stopped by government forces as they attempt to enter Baghdad. Women and children are being allowed to proceed, but men of military age are told to return to Anbar and fight for their country. There was little progress at the meeting on Iraq in Paris last week. Iraq’s prime minister accused the coalition of not doing enough to aid his government. No major changes in policy were agreed on during the meeting.
Although the US is stepping up arms shipments and the IMF has just loaned Baghdad $800 million to offset the decline in oil prices, the West is reluctant to get more deeply involved until there is some reconciliation between the Shiite government and the Sunnis.
The Kurdish regional government announced last week that it exported a record 578,000 barrels of oil last month, which is being marketed by Baghdad’s State Marketing Organization. In return, Baghdad is supposed to send the Kurds 17 percent of Iraq’s oil revenue or about $1 billion a month which they are not doing. The Kurds’ exports included 407,000 barrels from recognized Kurdish territory and 171,000 from the fields around Kirkuk that the Kurds have long claimed and occupied after the ISIL offensive last year.
The situation in Syria is clearly heading for some kind of closure. With government forces growing weaker and rebel forces continuing to make gains it only seems a question of time before the Assad government falls. Fighting amongst the various rebel groups is about the only factor in the government’s favor these days. There continue to be reports that the Assad government is doing what it can to help ISIL in fighting with other groups by dropping more barrel bombs on town captured by non-ISIL forces.
Last week was rife with rumors that as many as 50,000 Iranian troops or at least Shiite surrogates were on their way to Syria to prevent a defeat of the Assad government. Many doubt that Tehran would be willing to send its regular armed forces into such a morass due to the high casualties that would ensue and international reaction. Direct Iranian intervention against Sunni insurgents could easily become the catalyst of a much wider Sunni/Shiite conflict in the region.
The efficacy of coalition airstrikes is becoming more controversial. Washington says that the strikes are killing about 1,000 ISIL fighters a month, but notes that these strikes are carefully controlled to minimize civilian casualties. Some 75 percent of US sorties are returning to base without dropping their bombs for the lack of a well-defined target. ISIL does its best to keep its forces and equipment embedded among the civilian populace so that it only becomes vulnerable when massing for an attack or holding a fixed military position. It has also become adept at using sand storms to cover its movements. Over the long run, the steady attrition of ISIL forces, who have no meaningful air defenses against modern standoff bombs, has got to weaken their ability to prosecute a war despite their resolve.
Iran: Tehran is planning to start its “oil-for-goods” swap with Moscow that was announced several months ago. Under the scheme, which is clearly an attempt by Russia to undermine the UN and western sanctions and curry favor with Iran, Moscow is to swap up to 500,000 b/d of Iranian oil in return for undefined “goods” which could be anything from advance military hardware to food. Once Iranian oil is loaded onto tankers, it becomes part of Moscow’s oil marketing system and could be sold anywhere. So far traders say they see no signs of this oil entering the market, but another 500,000 b/d, which is likely to be more than any immediate cut in US shale oil production, is not going to do much for world oil prices.
The fate of the nuclear treaty, due to be settled in three weeks, is still up in the air. Republicans in the US Congress are trying to torpedo the treaty by extending sanctions on Tehran for another decade. Israel is calling for yet another extension of the time limit. Despite the doubts that a treaty will really be concluded this year, there is much optimism about Tehran/Washington rapprochement, an alliance against ISIL, and a flourishing of trade between Iran and the West.
Given Tehran’s deep involvement in supporting Shiite governments in Iraq, Syria, Lebanon and now Yemen, all of which are in turmoil, there is no telling how all this is going to play out. For now, all we seem to have is the possibility of some 500,000 b/d of the 1 million b/d of Iranian oil that has be shut in by the sanctions coming back on the market this summer.
Libya: The Islamic State continues to expand its reach. After seizing the towns of Sirte and Harawah, 46 miles to the east of Sirte, the group began staging attacks on military posts in and around the larger city of Misrata. The organization also has a presence in parts of Derna and Benghazi. The Islamic State in Libya is now estimated to have about 3,000 members recruited from abroad and from among radical Islamists in Libya. The two Libyan governments, which have been distracted by fighting each other, now realize the danger the Islamic State poses, especially if it can capture Misrata and are moving against it. The militant group has significant disadvantages, however, in that it has no source of funding and as Libya is all Sunni, there is not a Sunni-Shiite split that it can exploit. For now the movement does not appear to be a threat to Libya’s oil industry.
The bigger problem right now is the African refugee situation, which continues to grow worse with each passing week. Estimates of the number of refugees waiting along the Libyan coast for a boat in the direction of Europe is estimated at 500,000 or more. Over the weekend EU naval and humanitarian relief vessels patrolling off the coast of Libya rescued many thousands of refugees jammed on some 15 rickety fishing boats, most in danger of sinking. The people smugglers that organize these trips typically abandon the boats before or soon after departure from Libya. The question of military intervention to suppress the human trafficking is still under consideration by the EU. In recent days it is said that more of the refugee boats are coming from Sabratha which is under control of the Islamic State raising concerns that ISIL is attempting to infiltrate terrorists into Europe.
As in Iraq, Syria, and Yemen, the situation is unstable. The EU is unlikely to take on the burden of the hundreds of thousands or even millions of refugees seeking a new life in Europe. The only viable option at the minute seems to be occupying the ports from which the refugees are leaving. This in turn would introduce a new factor into the Libyan military/political situation. It could lead to still more chaos or possibly more stability and higher oil exports.
Saudi Arabia/Yemen: Saudi air strikes on Houthi forces continued over the weekend in the wake of a Houthi attempt on Saturday to hit the King Khalid air base in southwestern Saudi Arabia with a SCUD missile. The SCUD, which was sold to Yemen many years ago by North Korea, was shot down by US-supplied Patriot missiles. The humanitarian crisis continues to grow with the UN saying that some 20 million Yemenis are in dire need of food, water and medical supplies. UN sponsored peace talks are supposed to open in Geneva on June 14th. Both sides say they will attend.
Questions are starting to arise as to the future of Saudi Arabia under the new king. The ill thought-out air attack on the Houthis in Yemen seems to have sprung from an obsessive fear of Iran and the Shia religion in general. The attack is opening another Syria-type situation on the Saudi border, which seems destined to go on indefinitely to the detriment of the kingdom. By concentrating power in the hands of his immediate family King Salman is challenging intra-family power-sharing principles that have held the royal family together for decades. None of this is likely to have much bearing on oil exports in the immediate future, but the turmoil of the Middle East is slowly drawing nearer to Riyadh.
Moscow, in a spasm of nationalism, continues to isolate itself from the outside world. Last week it passed legislation which allows the government to designate any foreign or foreign financed organization operating in Russia as “undesirable.” Any Russian citizen having any association with an undesirable organization is subject to harsh penalties. The message to Russians as it was at the height of the cold war is to stay away from foreigners and their democratic ideas.
Some of the heaviest fighting in Ukraine in the last three months broke out last week as separatists armed with tanks attempted to capture the town of Marinka.
Over the weekend, the G7 group of world leaders met for the second year in a row without President Putin, who is being excluded for Russia’s involvement in the Ukraine and refusal to honor the ceasefire. During the meeting, the world’s leaders signaled a united front on continuing sanctions on Moscow until it modifies its policies. Greece, Hungary, and Italy for their own reasons are skeptical about the efficacy of the sanctions and the damage they are doing to European trade. Putin continues to argue that the Ukraine crisis was staged by the US and that Russia is not involved in the current fighting, He urged Greece and Italy to put their national interests ahead of western solidarity.
Russia’s ruble, which fell from 70 to the dollar last January to 49 in the middle of May, has resumed falling largely due to lower oil prices and is now trading at 56. Former Russian Finance Minister Kudrin disagrees with the Kremlin’s rosy projections for Russia’s economy and says that the worst is still ahead. Kudirin expects that Russia’s GDP will fall 4 percent this year and will see no growth in 2016.
Russia’s behavior in Ukraine – seizing Crimea and supporting ethnic Russian separatist forces – is causing major shifts in the energy markets. The EU now wants to reduce or eliminate its dependence on Russian natural gas as quickly as possible and Moscow would like to sell its oil and gas to China and other eastern nations with which it has fewer ideological problems. The recently announced deal between Moscow and Tehran to help Iran avoid the sanctions by taking 500,000 b/d of its oil is an example of the fallout from the Ukrainian situation.
Although Greece has little to do with the world oil markets, its endless economic crises are having an impact on the euro and in turn oil prices. The country, already deeply in debt to the IMF and EU banks, is unwilling to make the budget cuts and impose the taxes necessary to get its economy on a stable footing and to start repaying debts. Greece, which is notorious for not levying or collecting taxes and for generous state social programs, has been living on loans ever since joining the Eurozone back in 2001. After years of negotiations with various Athens governments, the major Eurozone members say they will kick out Greece out of the zone and possibly the EU. The effect of such a development on the euro would probably not be good as the lender nations likely would have to swallow Greece’s debt. This in turn would likely strengthen the dollar and force down oil prices.
Nobody in the EU is anxious to see Greece pull out or deal with the economic stability that would follow. More meetings are scheduled for this week.
5. The Briefs
Russian oil output remained unchanged in May at a post-Soviet high of 10.71 million b/d. Oil revenues are the cornerstone for many countries’ budgets, including Russia’s. (6/3)
Poland shale gas failure: ConocoPhillips is withdrawing from shale gas exploration in Poland as it has not encountered commercial volumes of the gas, the company said on Friday. ConocoPhillips said its subsidiary Lane Energy Poland has invested around $220 million in Poland since 2009. It drilled seven wells over its three Western Baltic concessions, all with insufficient results. (6/6)
Ali al-Naimi, Saudi oil minister for the last 20 years and the most influential voice in the world oil market, is apparently planning for retirement in the near-term and a successor is being groomed. The 79-year-old helped steer OPEC through some of its most tumultuous times, including the most recent decision late last year to not cut production, or market share, in the face of an over-supplied market. (6/6)
Iraq’s launch of its new Basra Heavy crude oil grade is selling too slowly in Asia. The No. 2 OPEC producer appears to have misjudged demand, supplying too much, too soon. The problems, which have increased shipping and marketing costs for term buyers and Iraq’s equity partners in its southern oilfields, may hamper the country’s efforts to ramp up exports. (6/3)
China is one clear winner while Middle East oil producers are driving prices lower and making life difficult for the US oil industry. The world’s second-largest economy become the top oil importer in April. The key reason? China is taking advantage of cheap oil to boost its strategic reserves, including storing oiloffshore in supertankers as it expands its onshore strategic petroleum reserve. (6/5)
China may take the lead, along with the trucking sector, in the transport shift from oil to natural gas and liquefied natural gas, a report from IHS finds. (6/4)
Asian shipyards, whose revenues have shrunk due to the weakness in globaloil prices which has led to a slowdown in newbuild rig orders, are looking elsewhere for fresh business opportunities covering floating production and offshore vessels. (6/6)
In Nigeria, despite the assurances by stakeholders in the petroleum sector on the resolution of the crisis in the sector, fuel scarcity has persisted in Abuja with widespread corruption practices recorded across almost all the petrol stations. (6/3)
Venezuela sought to open a new front in its months-long verbal assault on the U.S. shale oil industry on Wednesday, suggesting it posed a grave threat to water supplies. (6/4)
Alberta’s oil sands production has been crimped by wildfires for more than a week and they continue to burn, officials said Monday. Some 1,400 firefighters in northern Alberta—including hundreds from neighboring provinces—have been working to douse or corral dozens of wildfires that have raged for several days. (6/2)
In Alberta, staff members are returning to oil installations after emergency service officials cleared the area of major wildfire threats. As of Friday, more than 43,000 hectares have burned, though only five of the 41 active fires are considered out of control. Cenovus Energy said its crews were working to restore power to its Foster Creek oil sands operation, which has the capacity to process 135,000 barrels of oil per day. (6/4)
The US drilling rig count dropped 7 units during the week ended June 5 to settle at 868 rigs working, according to Baker Hughes Inc. Last week the count officially fell below the nadir of 876 touched during the 2008-09 downturn. Oil-directed rigs dropped 4 units to 642, down 967 from an Oct. 10, 2014 peak. The average Canadian rig count for May was 80, down 10 from April and down 82 from May 2014. (6/6)
EIA’s latest forecast: EIA’s Reference Case for US crude oil production is for an increase to over 10 million barrels per day and then staying level. Getting to 11 million barrels per day is the Low Oil Price case. If oil prices strengthen and/or oil recovery technology improves more, then the US crude oil production could head to 14 million barrels per day by 2025 in the High Price High Resource case. (6/4) (Ed. Note: 14 mb/d = dartboard alert!)
EPA fracking study draft results — Spin 1: The U.S. Environmental Protection Agency—after a four-year study that is the U.S. government’s most comprehensive examination of the issue to date—concluded that hydraulic fracturing, as being carried out by industry and regulated by states, isn’t having “widespread, systemic impacts on drinking water.” (6/6)
EPA fracking study draft results – Spin 2: The Environmental Protection Agency has released its long awaited draft assessment of the impacts that fracking has on the nation’s drinking water supplies — confirming that the process does indeed contaminate water. (6/6)
Oil exports campaign: U.S. Sen. Lisa Murkowski, chairwoman of the U.S. Senate Energy Committee, again pressed for an end to a 1970s ban on crudeoil exports, arguing the United States can prove its mettle with its oil reserves. (6/6)
Law protects fracking: Oklahoma cities and counties would be unable to ban hydraulic fracturing or other oil and gas operations under Senate Bill 809 that Oklahoma Gov. Mary Fallin has signed into law and which takes effect in late August. (6/3)
North Dakota tax trigger fails: North Dakota’s oil tax trigger was introduced by lawmakers to provide tax incentives to strained producers to ease the sting of prolonged lower crude prices. The formula requires that crude stay below $52.58 for five consecutive months, for the state to waive its 6.5% oil extraction tax. The oil trigger was expected to take place June 1st, but rising crude prices mean it won’t be implemented and producers will miss out on an estimated $480 million over the next six months. (6/3)
In North Dakota, state and federal authorities announced the creation of a “strike force” aimed at addressing growing organized crime in and around the Bakken oil field. (6/5)
North Dakota experienced its wettest May on record and all the rain is causing trouble for some oil and gas producers. The region had almost 8 inches of rain last month and now floodwaters threaten operators near the confluence of the Missouri and Yellowstone rivers. More rain is expected and could cause raise flood levels to 22 feet by this weekend. Inclement weather can easily wreak havoc on the energy infrastructure including well flooding, road closures and truck bans. (6/6)
In Texas, the outlook in the oil and gas sector remains negative as most companies expect low capital spending in 2016, the Dallas Federal Reserve said. Texas is the No. 1 oil producer in the nation. A weak market for crude oil, however, is throttling the state’s overall energy trajectory. In its latest data release, the Railroad Commission of Texas, the state’s energy regulator, said preliminary data from March show crude oil production averaged 2.31 million barrels per day, down from the 2.34 million bpd reported in February. (6/5)
More Texas LNG? Australian energy company Woodside said Thursday it was in preliminary discussions to explore options for liquefied natural gas development in Port Arthur, Texas. (6/5)
Weekly US coal production last week was the lowest level in the last five years, US EIA data showed Thursday. The estimate was down 6.1% from the prior week and down 20.7% from the year-ago week. (6/5)
Coal closures: Rhino Resource Partners is temporarily idling a majority of its US Central Appalachia coal operations because of the ongoing weakness in the coal markets, the producer said in a statement Tuesday. (6/3)
Coal slowdown: The Illinois Basin market continues to wilt as low spot demand and ongoing production leaves more tons on the ground and anxious producers with more to sell, market sources said Friday. “We’re at the point where it’s no longer rhetoric to say we’re going to leave coal in the ground rather than sell at these prices,” one producer said. (6/6)
China’s appetite for coal used in steelmaking is faltering, deepening a market downturn miners say is the worst in recent memory. The price of steelmaking coal shipped from Australia has fallen 23 percent this year to roughly $86 a metric ton, its lowest level in nearly a decade. The slide extends a decline begun in 2011, during which the fuel’s value has slumped by around three-quarters. The consultancy Wood Mackenzie doesn’t expect the oversupply of steelmaking coal, or coking coal, to clear up until about 2022. (6/3)
Decreasing prices in solar power could provide opportunities for oil-poor countries. Costs have halved in just three years, energy consultant Robin Mills noted last week; he said solar can now beat all conventional generation apart from the very cheapest gas. At Jordan’s recent solar auction, solar’s bid was just over 6 US cents per kilowatt-hour. These were just slightly above the record 5.84 cents from Acwa Power last November for the 200 MW second phase of Dubai’s solar park.
The first three of numerous solar energy projects were sanctioned under a fast-track program that envisions enough power for 8 million homes. US Interior Secretary Sally Jewell announced the first three solar projects were approved according to the terms of the so-called Western Solar Plan. Once built, the three projects on public lands in Nevada will generate as much as 440 megawatts of energy, enough to meet the annual demands of about 132,000 homes. (6/3)
French geothermal: Greater Paris already boasts the world’s largest concentration of deep geothermal wells linked to heating networks, even before five new drilling projects. An energy law making its way through the French parliament that seeks to spur renewable energy could lead to more. This is reportedly the most active period for geothermal in two decades. (6/2)
Tidal power: A Chinese construction company has been chosen to build the world’s first tidal lagoon project for generating clean electricity in Britain. The state-owned China Harbor Engineering Company has won the deal to undertake marine works on the £1bn Swansea Bay Tidal Project, which will deliver power to the National Grid, potentially enough for 120,000 homes. (6/3)
The pace of global warming hasn’t slowed since 1998, a finding that contradicts a major United Nations study and challenges a key argument of skeptics of manmade climate change. Temperatures since 2000 have risen at a pace that is “virtually indistinguishable” from the rate of the five preceding decades, according to NOAA research published in the journal Science. (6/5)
In India, a “no” on emissions caps? Across a broad range of Delhi politicians and policymakers there is near unanimity about action on climate change. Apparently there is simply no possibility that at this stage in its development India will agree to any form of emissions cap, let alone a cut. (6/1)
CA drought: Ordered to use a fourth less water during this record drought, Californians managed to get about halfway to their goal in April, regulators announced Tuesday. California residents reduced overall water usage by 13.5 percent compared to the same month in the benchmark year of 2013. (6/3)
In drought-ravaged California, there is a water-grab drilling boom in the Central Valley that rivals any of the land grabs a century ago. Farmers who have lost access to surface water are drilling so many wells that related surface subsidence is causing problems with surface water canal flows. (6/6)
In Oman, unregulated pumping of groundwater is depleting aquifers and causing the long-reliable channels to run dry. In mid-May, the desert of northern Oman may have been the hottest place on the planet (47 degrees C, 117 degrees F). (6/3)