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Contents
1.  Oil and the Global Economy
2.  The Middle East & North Africa
3.  China
4. Russia/Ukraine
5. Greece and the EU
6. The Briefs

1.  Oil and the Global Economy

New York oil futures closed at $57.15 on Friday, little changed for the week, but London futures advanced to close at $65.28, a five month high.  The London/New York price spread widened to $8.13 a barrel as continued growth in US crude stocks kept US prices in check, and continued fighting in the Middle East pushed London’s prices higher.  The course of oil prices in the months ahead remains a matter of much dispute.

Oil company CEO’s meeting in Houston last week generally expressed the opinion that the industry was in for a lengthy period of relatively low prices as there is enough new production on the horizon mostly from the Middle East to offset the sluggish global demand growth that is forecast. This could in theory continue the 2 million b/d surplus of crude that has driven prices lower in the last year. Many on Wall Street, however, believe that the falling US rig count will soon result in substantially less US shale oil production leading to a rebound of prices. This situation has led to more volatile markets with prices reacting to fundamental and geopolitical news.

The term “fracklog,” which means a backlog of wells that have been drilled but have not yet been fracked and opened for production, has come into vogue in recent days.  The current estimate is that there are some 4,800 of these newly drilled wells waiting to be placed into production that could initially produce as much as 300,000 b/d if they could be quickly fracked and brought into production – a doubtful proposition.

For now the US rig count continues to fall – down 31 last week; US crude stocks continue to increase – up by 5 million barrels in the most recent stocks report; and, according to the EIA estimate, US domestic production was down by 18,000 b/d in the latest report – not much of a drop in comparison to 9.3 million b/d in US domestic production and 7.8 million b/d of imports.  The fundamentals are still saying that there is a considerable global surplus much of which is ending up in US tank farms, which will likely take some time to come into balance.

Over the longer term, however, the $114 billion and counting cut in global oilindustry spending is bound to have an impact. Some of this cut in capital spending can be made up for by “efficiencies” the industry has been touting of late and by the lower pay of oil workers given the massive layoffs that have been taking place. However, some of these cuts were scheduled for expensive deep-water and arctic drilling which can be very productive, but takes many years to bring on-line.  Oil prices will have to increase significantly and show signs of remaining at higher levels before many additional high-cost per barreloil production projects are authorized.  Some believe that US shale oilproduction will be headed downwards by the end of the decade for geological reasons. Cuts in spending on deep-water production now will also curtail offshore production about the same time US shale oil production starts to decline.

Another good question is how much longer Wall Street will be willing to finance the operations of the many shale oil drillers that have always had a negative cash flow and show no signs of ever becoming profitable unless prices rebound to well in excess of $100 a barrel. In an era of close-to-zero interest rates, bankers were willing to finance high-yielding loans to shale oil drillers with little prospects of ever paying the money back so long as they could cover the interest payments.  At some point interest rates will rise and loans which are unlikely to ever be paid back are sure to end or be significantly reduced.

2.  The Middle East & North Africa

Iraq/Syria: In the wake of Baghdad’s recapture of Tikrit north of the capital, ISIL fighters regrouped and launched an offensive in Anbar province and against the large Baiji oil refinery which has been out of service for more than a year. These offensives were beaten off with the help of, largely US, airpower. The US has now dropped some 16,000 bombs on ISIL forces and installations since it began bombing ISIL last year. It is becoming clear that the combination of Baghdad’s best troops and Shiite militia, backed by heavy US airstrikes can make some progress against ISIL, but cannot hold territory or do much more than force ISIL withdrawals from fixed positions.  At Ramadi, in Anbar province, Iraqi security units simply withdrew, triggering the mass exodus of some 100,000 civilians from the city and adding to the ever-growing humanitarian crisis in Iraq.

The growing ISIL threat coupled with low oil prices is starting to harm Iraq’s efforts to grow its oil production. The need for funds to fight ISIL is slowing capital investment and payments to the foreign oil companies expanding Iraq’soil production in the south.  While oil production has been growing in the last two years and is now in the vicinity of 3.6 million b/d, the ISIL threat seems likely to constrain further increases. ISIL is a resilient movement that has shown the ability to survive and maintain an offensive posture despite the rain of coalition bombs against which it has few defenses.  Should ISIL decide that a good way to weaken the Baghdad government is to go after the foreign oilcompanies working in the south the situation could change radically and Iraqioil exports could be seriously threatened.

In Syria a coalition of Islamist rebel groups, ranging from those with some US support to al Qaeda and calling themselves the “Army of Conquest”, has captured a key town in the northwest, which cuts off Assad’s Alawite stronghold along the coast from Damascus.  This move allows the rebels, which now seem to be acting in concert, to threaten the Assad government’s base of support.  With ISIL forces now entrenched only 10 miles from downtown Damascus, the civil war seem poised to take a new turn. Moscow, Tehran, and Hezbollah have a lot at stake in all this. We can expect some sort of movement soon.

What all this has to do with future Middle Eastern oil exports is a good question. For now all that can be said is that the Middle Eastern situation becomes more complex and even bizarre with every passing day with tribal and sectarian hatreds on the rise and the death and refugee tolls ever rising. In the long run this turmoil is likely to make it into the Gulf oil fields with serious consequences for oil exports.

Libya:  The migration saga continues to dominate the news as thousands of would-be migrants continue to board boats in Libya in hopes of making it into the EU. The issue of EU military intervention to stop the migration is still up in the air.

OPEC says Libya was producing about 475,000 b/d of crude in March, which was up some 165,000 b/d from February’s production. All the production numbers remain suspect and the prospects for further increases are doubtful. Over the weekend, for example, there was a new report that a 100,000 b/d oilfield has just been closed. The recognized government in Tobruk does not seem to be having any success is convincing foreign buyers to send the proceeds from oil sales to its account in Dubai rather than to the central bank in Tripoli.

Iran:  Tehran’s position in the Middle East becomes more complicated with each passing day. The nuclear negotiations resumed in Vienna on Thursday with no word of progress on the crucial issues that remain. Iran’s efforts to send supplies to their fellow Shiites attempting to take over Yemen was turned back with a US carrier task force.  With the fate of the nuclear negotiations hanging in the balance, Tehran clearly did not want a direct military confrontation with the US or undergo the humiliation of having US forces stop and search its Yemen-bound convoy.

At the same time the Assad regime was suffering a major setback in northern Syria, Israeli warplanes struck a missile storage depot in southern Syria that was likely involved in moving Iranian-supplied missiles to Hezbollah. Again all this says that the overall political situation in the Middle East is deteriorating and the possibility of the numerous hostilities engulfing the oil exports continues to increase.

Yemen/Saudi Arabia: Although the country’s oil and gas exports were minimal even before the current fighting began, the fate of Yemen continues to preoccupy the oil markets because of its strategic position on the border of Saudi Arabia and the threat that a protracted war there could spill over and threaten the Saudi monarchy.  While the US trained and equipped Saudi Air Force is competent by Middle Eastern standards, the Saudis have never maintained much of a standing army because of the threat such an institution could pose to Saudi rule. The Saudis therefore have limited their operations against the Houthi advance to air and naval power. There have been some skirmishes along the Saudi border but the Saudis are unlikely to send their weak and inexperienced ground forces into mountainous terrain of northern Yemen against the more experienced Houthi forces which are backed up by some units of Yemen’s army

The Saudi monarchy has always been one of the principal targets of jihadists such as al-Qaeda and ISIL who would love to drive it from power and take over its oil income. Over the weekend, ISIL even released a video showing that some of its troops are now in Yemen preparing to battle the Houthis.  A prolonged war in Yemen, which devolves into a Syrian-like free-for-all, would offer opportunities to start undermining the Saudi monarchy – which consists of some 1,500 royal personages sitting above 27 million inhabitants who have no political representation. On the other hand, they don’t pay any taxes either.

Since World War II the Saudis have depended on the US for their defense against external threats. In the current fighting, Washington was quick to come to the Saudis’ aid with intelligence and logistical support recognizing the importance of the Saudi’s 10 million b/d of oil production to the global economy. It is far too early to consider a threat to the Saudi monarchy arising out of the Yemeni civil war, but in the longer run such a threat is a possibility as the stability of the Middle East continues to deteriorate.

3.  China

The state of and prospects for Beijing’s economy are still a key factor in the global demand for oil. Last week a new McKinsey & Co report pointed out that the total Chinese debt load is now about $28 trillion while its GDP is about $10 trillion. These debts have resulted from decades of spending on massive infrastructure projects, state-owned enterprises, and housing as the country moved from an agrarian to urban based society. Much of this investment is turning out to be uneconomic as exports stall and the scale of overbuilding becomes apparent. The IMF says that that China’s economy will continue to decelerate at least through 2016 and doubts are starting to emerge as to whether it will hit the 7 percent growth rate planned for this year.

Last week the state-owned China National Offshore Oil Corp. reported that the drop in oil prices has led to nearly a 40 percent drop in company revenues and that it was cutting back investment this year by about one third. China’s ever-growing oil demand has been the major support for oil prices in the last decade. Whether Beijing, which has announced numerous programs to get the economy moving again, will be successful is one of the key factors in determining where oil prices will go during the remainder of the decade.

4. Russia/Ukraine

As in the case of China, the health of Russia’s economy remains a major issue. Although the ruble has stabilized since January, the economy continues to contract with little hope of recovery so long as oil prices remain low.  The nationalistic rhetoric of vituperation against the US and EU coming out of Moscow continues to get worse and ongoing support for Ukrainian separatists suggests that the end of the sanctions is nowhere in sight.

Last week the EU formally accused Gazprom with overcharging customers in Eastern Europe for its natural gas by as much as 40 percent. As could be expected, Foreign Minister Lavrov responded that the charges are baseless, but expressed the hope that an amicable solution could be found. Russia has long used Gazprom as a foreign policy tool leveraging its monopoly position to deliver natural gas to many EU countries to gain its policy objectives. Gazprom’s sales to the EU have been slipping as its base price of $330 per thousand cubic meters is now being undercut by LNG from the Middle East which is now going for $270 per thousand.  With the possibility of new sources of LNG from countries such as the US, Azerbaijan, and even Iran coming online, Gazprom sales to the EU are likely to drop in coming years. At some point Gazprom may have to depoliticize its contracts to remain competitive or end up with China as its major natural gas customer.

For now Russia is unlikely to respond forcefully to the EU charges until it sees what happens in July when the EU votes to renew sanctions on Moscow for its actions in the Ukraine. If the sanctions are renewed, Moscow is likely to remain obstinate in supporting the rebels in the Ukraine.

5. Greece and the EU

As the possibility of a Greek default and exit from the Eurozone draws closer, the war of words between Athens and the Eurozone governments grows harsher.  For now everyone wants to avoid blame for what might happen if Greece defaults. Athens is blaming the Germans for the World War II occupation and is demanding still more reparations while the Eurozone governments are accusing the Greeks of failing to take hard decisions and free loading on the rest of the zone.

For now there seems to be a temporary agreement that local and state governments in Greece will send their spare cash to Athens to keep the government going for the next few weeks.  The radical left wing government elected in January is refusing to undertake a complete overhaul of its financial system as demanded by the other zone members.  The situation is likely to continue for several months as various payment deadlines come due, but could result in a Greek default and exit from the zone leaving the rest of the EU holding much worthless debt. All this could eventually lead to a weaker euro, which would strengthen the dollar and lead to downward pressure on oil prices.

6.  The Briefs

In the EU, liquefied natural gas needs to re-emerge as a central component of energy security strategies, the European commissioner for energy said. The European Commission this week filed statements of concern against Russian natural gas company Gazprom, saying it was violating antitrust measures in Eastern and Central Europe. The European market gets about 20 percent of its gas needs met by Russia, though most of that supply runs through a Soviet-era transit network in Ukraine, where lingering political and national security issues present risks to European energy security. (4/25)

Merger talk: Europe’s biggest independent oil companies are flush with energy assets, but battered by the collapse of crude prices. Investors are now betting on which one could be the next big acquisition target, following Royal Dutch Shell’s deal earlier this month to buy BG Group for $70 billion. Europe’s bevy of targets include Tullow Oil, Genel Energy, and Sweden’s Lundin Petroleum. Investors are expecting deals in the U.S. as well. (4/24)

In the U.K., the Lancashire County Council, at the center of a fledgling shale natural gas program, said it needed more time to review planning applications.  Cuadrilla Resources estimates there may be as much as 200 trillion cubic feet of shale natural gas in Lancashire. The Lancashire County Council recommended rejecting the companies’ drilling applications, though Caudrilla in January was given more time to address concerns about noise pollution and traffic in the area. (4/25)

Gazprom’s CEO pushed a plan Tuesday to sell its natural gas to the European Union via Greece, but made no public offers of immediate sweeteners during a visit to cash-strapped Athens. (4/22)

Abu Dhabi plans to invest over $25 billion in the next five years on boosting itsoil production capacity from offshore fields. The plan is part of the United Arab Emirates’ strategy of increasing its crude oil output potential to 3.5 million barrels per day by 2017-18. (4/21)

In Egypt, Italy’s Eni said Monday its oil production in the Western Desert has reached a record level, doubling its rate to around 70,000 barrels of oil per day in just three years. (4/21)

In Algeria, Spanish energy company Repsol announced it has made a natural gas discovery, its third in an area bordering war-torn Libya. The company is the operator in a consortium that includes French energy company GDF Suez and Algeria’s state-owned Sonatrach. (4/21)

In Uganda, a weakened crude oil market means investments might not materialize in time to finance its fledgling oil sector, the Bank of Uganda said. Whereas oil production had been projected to start in 2018, this date could now be pushed out even further, given that the profitability of oil investments could remain depressed in the foreseeable future. (4/23)

Ghana’s decision to seek arbitration at the International Tribunal for the Law of the Sea in a dispute with Ivory Coast over an oil-rich basin in the Atlantic could prove costly for the country and a consortium led by Tullow if a court halts development there. Although many expect the dispute to be ultimately settled in Ghana’s favor, analysts say a ruling that prevented the $4.9 billion offshore TEN oil and gas field opening in mid-2016 would be a further blow to the battered Ghanaian economy. (4/25)

Nigeria’s Minister of Petroleum Resources, Diezani Alison-Madueke, has denied planning to flee the country to escape alleged corruption charges under the incoming Buhari government. Mrs. Alison-Madueke struck a defiant tone Wednesday, dismissing allegations that six countries had denied her requests for asylum. (4/25)

In Nigeria, with low crude oil prices, the budget—which the out-going Finance Minister first based on $78 per barrel crude oil price—is toast. Now, with weak demand from traditional customers, it is obvious that the Age of Crude is surely over in Nigeria – at least for a while. A major economic crisis faces the nation. By the time President Jonathan hands over the leadership of Nigeria to Buhari, the country will have once again been classified as a near bankrupt economy. Earnings from crude oil will just about be sufficient to pay for all the foreign loans taken by the Federal and state governments. Even Nigerian states which struggled to pay salaries before the elections will now start defaulting in payments.  (4/20)

Brazil’s state oil company Petróleo Brasileiro put a price tag on a corruption scandal that has thrown the country into political and economic turmoil, writing off $17 billion due to losses from graft and overvalued assets. (4/23)

Venezuela has launched talks this month on a novel plan to blend the country’s heavy crude with light oil from other OPEC allies, seeking to create a new variety that can compete against swelling U.S. and Canadian supplies. The proposal, which would expand on a pilot scheme involving Algerian oil last year, envisions supplying refineries built for medium-grade crudes rather than the light oil that has become plentiful as a result of the North American shale boom, (4/20)

Every time Venezuela introduces a new, weaker currency exchange rate, some of the world’s largest companies face the decision of whether or not to adopt it. If they eventually do switch to the less favorable rate, it can result in multimillion-dollar charges that drag down balance sheets and earnings statements. At least 46 S&P 500 companies have told investors about potential exposure to Venezuela’s currency in the past year. (4/25)

Mexico’s Pemex—the country’s sole hydrocarbons producer for nearly 80 years—has seen output sink by one-third since 2004, when the giant shallow-water Cantarell field was at its height, and the company has already cut its 2015 production forecast once this year. Furthermore, Pemex, the main contributor to the federal budget, is shouldering the brunt of public sector cuts in a government austerity drive as it seeks savings of some $4bn this year. (4/22)

In Mexico, an expected wave of international geological firms set to scan its oilpatch for oil and gas reserves will give the country a clearer picture of its riches, the nation’s top energy regulator said Monday in an interview. (4/21)

TransCanada Corp. is asking the U.S. government to permit a 200-mile pipeline across the U.S.-Canadian border, to transport up to 300,000 barrels a day of North Dakota crude to a connection in Saskatchewan. (4/25)

Shipping Canadian oil to a West Coast port through a proposed 730-mile pipeline brings with it the promise of 4,000 or more jobs along a route that would run through impoverished indigenous communities. But Chief Justa Monk, who runs a reserve with an unemployment rate that hits 70%, wants none of them—and pledges to block the pipeline alongside the reserve’s territory. (4/21)

The total US drilling rig count fell 22 units to 932 rigs working during the week ended Apr. 24, marking the 20th consecutive week of declines, according to data from Baker Hughes Inc. The count has now plunged 988 units—51%–since the week ended Dec. 5…The oil-rig count fell by 31 to 703. There are now 56% fewer oil rigs compared with a peak of 1,609 in October, (4/25)

The US overall in 2013 had 36.5 billion barrels of crude oil and lease condensate proved reserves, up from 22.3 billion in 2009, according to a report from the US EIA which focuses on the top U.S. 100 fields. The top 100 oil fields represented 56.4 percent of the 2013 total and 62.3 percent of the 2009 total. The US overall in 2013 had 354 tcf of total proved gas reserves, up from 283.9 tcf in 2009. Top 100 US gas fields represented 67.7 percent of the 2013 total and 60.8 percent of the 2009 total. (4/25)

Atlantic offshore speedbump? Observing both Earth Day and the fifth anniversary of the Macondo deepwater well accident and crude oil spill, US Senate and House members—largely Democrats from Northeastern and Mid-Atlantic states—introduced bills to stop federal offshore oil and gas leasing off the Atlantic coast. (4/24)

The Permian Basin of West Texas and New Mexico is probably only in the “second or third inning” of its full development potential, said Pioneer Natural Resources’ CEO Scott Sheffield at CERAWeek. He stated that two prolific Permian horizons — the Spraberry and Wolfcamp in the eastern part of the basin — contain about 75 billion barrels of equivalent recoverable oil, while the western part of the basin holds another 25 billion barrels recoverable. (4/22)

Statoil has let a major carbon dioxide supply and service agreement to Ferus LP of Denver to supply liquid CO2 to be used in a test well to evaluate potential production uplift and partially replace water in a large multistage hydraulic fracturing operation in a horizontal oil well. The service agreement also includes the deployment of a membrane technology that separates the CO2 from the produced gas to reduce flaring. (4/22)

Job losses: While the U.S. economy continued to add jobs last month, states that rely heavily on the oil industry experienced significant cuts. Job losses hit particularly hard in Texas (down 25,400 jobs) and Oklahoma (down 12,900), leading the nation in losses. North Dakota lost 3,000 jobs, a significant cut in such a small state. (4/22)

Halliburton warned of pricing pressure for its oilfield services in North America, its largest market, and challenges in its international operations, as an extended slump in oil prices continues to force drillers to slash spending. Halliburton agreed to buy Baker Hughes for $35 billion last November, a deal aimed at helping both companies weather the slump in oil and resist pressure from oil producers to slash prices.  Together, Halliburton and Bakers Hughes are cutting more than 13,000 jobs to rein in costs. (4/21)

Earthquake link: New scientific findings linked earthquakes to the practice of injecting wastewater from oil and gas operations deep underground, adding to a growing consensus among researchers that energy development is probably causing seismic activity in Oklahoma, Texas and other parts of the U.S. (4/22)

Railway slowdown: The DOT’s Federal Railroad Administration issued an emergency order on Friday that establishes a maximum speed of 40 miles an hour for certain trains going through high threat urban areas. Citing “gaps in the existing regulatory scheme”, the agency made this speed limit a requirement for trains hauling crude oil and other flammable liquids.

Canada issued an emergency directive aimed at slowing crude-carrying trains traveling through urban areas and requiring increased inspections and risk assessments along key routes used for transporting dangerous goods. The directive is the latest in a series of steps by the Canadian government to boost rail safety in the wake of a number of derailments of crude-carrying trains as crude-by-rail shipments rise. Trains will be required to slow to a maximum of 40 miles an hour through highly urbanized areas.

New Zealand is ready to help lead an international movement toward including more geothermal energy in its renewable portfolio, the energy minister said Monday. New Zealand has contributed roughly 25 percent of the growth in geothermal energy capacity over the past five years and is now the fifth largest geothermal power generator in the world. The share of electricity generated from renewable resources in New Zealand during 2014 was 79.9 percent, a 5 percent increase from 2013.

China needs to cut lending to coal-related industries and shift more financing to cleaner businesses in order to address a huge funding gap that is hindering the country’s war on pollution, a study drawn up by central bank researchers said. The researchers found that bank loans to the coal sector rose sharply from 2012 and more than doubled in 2013, a period when growth in Chinese energy demand remained high and coal firms were rapidly expanding. (4/24)

US emissions: For the second year in a row, energy-related carbon dioxide (CO2) emissions in the United States have increased. However, unlike 2013, when emissions and gross domestic product (GDP) grew at similar rates (2.5 percent and 2.2 percent, respectively), 2014’s CO2 emissions growth rate of 0.7 percent was much smaller than the 2014 GDP growth rate of 2.4 percent. (4/21)

An Environmental Protection Agency rule to reduce greenhouse gas emissions from the existing power fleet could bring almost 100 GW of new natural gas-fired generation to the US by 2030, the North American Electric Reliability Corp. said in an assessment released Tuesday.

Clean Power Plan: Gina McCarthy, administrator of the US Environmental Protection Agency, said at CERAWeek that the Clean Power Plan, which calls upon the US power sector to reduce carbon dioxide emissions by 30 percent below 2005 levels by 2030, mainly through the retirement of coal-fired power plants, should be considered a major plank in the nation’s low-carbon future. Final rules governing the plan are now to be issued in June. Between 108,000 MW and 134,000 MW of coal retirements are envisioned by 2020. (4/24)

Batteries for EVs: Industry-wide cost estimates for battery packs for electric vehicles have declined by approximately 14 percent annually between 2007 and 2014, from above $1,000 per kWh to around $410/kWh, according to a systematic review of more than 80 different estimates by a team from the Stockholm Environment Institute. The cost of battery packs used by market-leading BEV manufacturers is even lower at $300/kWh. The results further suggest that it is possible that economies of scale will continue to push cost towards $200/kWh in the near future even without further cell chemistry improvements. (4/20)

China is urbanizing at a staggering rate—in 35 years, it has added more than 500 million people to its cities. As a result, it looks like the world has vastly underestimated the size and scope of growth in China’s megacities, defined as those with more than 10 million people. (4/21)