Peak Oil Review - May 12

1. Oil and the Global Economy

Last week’s trading left futures prices little changed. New York oil closed Friday at $99.99 a barrel and London closed at $107.89. As has been the case for several weeks, the US crude inventory, weak demand, and the Ukrainian and Libyan situations were the main drivers of the oil markets. US crude imports were down markedly the week before last leading to a drop in inventories along the Gulf coast and even total US crude inventories for the first time in many weeks. Some analysts are wondering if Gulf Coast storage facilities can absorb much more oil.

Natural gas futures dropped sharply on Thursday after the inventory report showed that the warmer weather has led to natural gas being injected into storage caverns at close to the normal pace. Futures prices are down about 30 cents per million from the $4.85 level touched the week before last. Even though injections are back to a normal level for the time of year, the EIA warned that above average injections will be necessary this summer if US stocks are to be ready for normal temperatures in the years ahead. The Administration is worried that increases in natural gas production are not keeping pace with forecasts and notes that more effort is being directed towards producing “wet” gas which contains valuable natural gas liquids. This may not be an option for gas producers in Pennsylvania and West Virginia which is the region where production is growing the fastest and produces mostly unprofitable “dry” gas. Many producers there continue to lose money in hopes that prices will someday climb to profitable levels.

The EIA notes, however, increased production of natural gas liquids is leading to lower prices as the markets cannot currently absorb all that is produced. One study estimates that some 200,000-400,000 b/d of natural gas liquids are simply being sold off as natural gas for lack of a market.

A new study by Barclays Bank says that the shale oil and gas boom continues because Wall Street is financing unprofitable drilling companies through high-yielding junk debt which has grown nine-fold since the shale boom began. Of the 97 shale oil and gas production companies rated by S&P, 75 are below investment grade. Cheap debt stemming from government policies has been just as important as fracking and horizontal drilling in fostering and sustaining the shale boom.

The major news of the week was a renewal of the administration’s efforts to reduce carbon emissions and still another federal court ruling supporting the EPA’s drive to regulate industrial emissions. To bolster the administration’s claims that something must be done now, the government released a new 840-page report that directly blames changing weather patterns on the burning of fossil fuels. The study holds that human-induced climate change is being felt in every region of the US through water scarcity and torrential rains, heat waves, fires and dying forests.

2. The Middle East & North Africa

Iran: With the nuclear negotiations resuming in Vienna this week, many Iranian conservatives fear that the Rouhani government will sell out Iran’s right to develop nuclear energy in hopes of relieving the sanctions and reviving the economy. Part of the issue is that the hardliners who run much of the country got only 4 million votes out of 50 million eligible voters in the last election and fear a successful nuclear treaty would further diminish their political power. With the future of Iran at stake, Rouhani will have a hard time curtailing the political and economic power of institutions such as the Revolutionary Guard that have dominated the government of the country for the last 35 years. The next few months may see a turning point in the history of modern Iran and even in the stability of oil exports from the Middle East.

Iraq: Although oil exports increased by 113,000 b/d in April to 2.5 million b/d, there was very little other good news out of Baghdad last week. The preliminary vote counts from the parliamentary elections should be available this week and are expected to show that no party or bloc has the votes to form a government. This will usher in a lengthy period of negotiations among the parties aimed at creating a workable coalition.

In the meantime, the violence continues apace with attacks on mostly Shiite civilians and government installations and shelling of insurgent-held districts in Anbar province continuing. The government clearly does not have the military strength to dislodge the insurgents so has to be content with shelling of populated areas, adding to the growing refugee stream. There are reports of desertions among the 42,000 government troops that have been sent to Anbar to drive out the insurgents.

Sunni insurgents have responded to the shelling by launching a series of attacks on Shiite civilians and army facilities. In one incident the insurgents overran an army outpost that was guarding the northern export pipeline and executed the 20 soldiers captured at the facility.

The situation has become so hopeless that the government is seeking more US help in the form of armed drones and would even be willing to allow US military personnel back into the country to operate them. Some observers hold that Iraq is not as yet close to coming apart along ethnic and confessional lines; however, events are moving quickly. Despite progress in extracting ever increasing amounts of oil from fields in southern Iraq which has been mostly immune from the fighting, the overall situation continues to deteriorate.

Libya: Libya’s Congress seems to have elected a new prime minister last week, but the dissidents who are occupying the eastern oil ports are refusing to deal with him. For now, the two smaller eastern oil ports with a combined capacity of 140,000 b/d seem to remain open, while no progress has been made on opening the larger ports. This would leave Libya with sporadic exports that may total some 250,000 b/d, down from 1.4 million before the dissidence began.

The usual amount of violence and unrest continues in the country. The African refugee issue is back in the news. Libya told the EU this week that unless it can provide unspecified help in dealing with the thousands of Africans making their way across the Sahara in hopes of getting to a better life in the EU, Tripoli will start facilitating their journey across the Mediterranean.

Syria: Although Damascus no longer exports oil, the growing scope of the uprising with its focus on the Sunni/Shiite conflict has the potential to destabilize the region as is already happening in Lebanon, Turkey, and Iraq. Last week was marked by a deal under which the insurgents were evacuated from Homs under a flag of truce leaving behind a devastated city for the Assad government and their allies to deal with. While the evacuation of Homs may have been a “victory” for government forces, the rebels managed to blow up the Carlton Hotel in Aleppo which was being used as a barrack by government forces.

The Assad government has clearly regained the initiative in the fighting in the past year and now feels confident enough to hold an election for another seven-year term. Assad is, however, presiding over a basket case in which the insurgents hold large swaths of the country, much of the population has become refugees and the government is forced to exist on handouts from Moscow and Tehran. There is no end of this situation in sight and its potential to destabilize the region continues to grow.

3. China

Chinese crude imports rose to an all-time high of 6.81 million b/d in April passing the previous record of 6.66 set in January. Analysts attribute the increased imports to the opening of a new refinery, refilling of commercial stockpiles that fell during the winter, and the return of refineries from maintenance. Beijing’s manufacturing contracted for the fourth straight month in April; however, the pace of contraction is slowing and the April trade numbers were better than recently with exports up by one percent year over year.

China switched on its 19^th nuclear power reactor as it rushes to increase nuclear generation. The country plans to switch on 8.64 gigawatts of nuclear generating capacity in 2014 as compared to 3.24 gigawatts of new capacity in 2013. The availability of uranium for China’s nuclear industry is becoming an issue. Beijing may have to import some 80 percent of its uranium by 2020, as compared to the current 60 percent.

Concerns are growing over Beijing’s plans to build large numbers of massive coal-to-methane conversion plants to pipe the methane into large cities thereby cleaning up the particulate pollution that is damaging the health of millions of Chinese. While burning the gas in cities certainly reduces the smog, the conversion of coal to methane results in an 82 percent jump in carbon emissions as compared to simply burning the coal. If these plans come to fruition China is likely be consuming ever more coal offsetting worldwide efforts to control carbon emissions. While China’s leaders clearly have gotten the message that much of their country is succumbing to dirty air, they have yet to appreciate the full dangers of global warming in their race for economic growth.

4. Ukraine

The situation is as chaotic as ever with referendums over the weekend run by pro-Russian separatists showing that in the cities that voted, voters want to separate from Kiev despite polls showing that 70 percent wish to remain part of the Ukraine. The vote was taken despite Moscow’s objections and insistence that it does not want to annex eastern Ukraine and only desires a fair shake for the Russian speakers living in the country. Moscow may fear that more annexations could eventually lead to a sanctions war with the West which would damage its economy. With the heavily pro-Russia Crimea no longer part of Ukraine, Moscow is unlike to see a pro-Russian president elected in Ukraine in the near future and therefore seeks to weaken the country as much as possible so as not to encourage anti-Russian sentiments among its minorities.

Despite the fears of oil traders, so far trade with the West and Russian energy sales have not figured prominently in the sanctions that have been imposed. Last week Moscow said that it Ukraine will have to prepay for the natural gas it receives in June as Ukraine’s debt to Gazprom has now reached $3.5 billion.

The situation is likely to remain chaotic for some time to come as Kiev attempts to hold an election to select a permanent president on May 25^th amid efforts to drive well-armed pro-Russian separatists from the government buildings they are occupying in eastern Ukraine. The economies of the EU and Russia have been inextricably linked and neither side wants to trigger more economic troubles by imposing serious sanctions during hard times. For this reason alone the world is likely to muddle through this crisis unless one side or the other seriously miscalculates.

5. Quote of the Week

“There’s a lot of Kool-Aid that’s being drunk now by investors. People lose their discipline. They stop doing the math. They stop doing the accounting. They’re just dreaming the dream, and that’s what’s happening with the shale boom.”

— Tim Gramatovich, chief investment officer Peritus Asset Management LLC.

6. The Briefs

Angola probably won’t reach an output target of 2 million b/d next year because new projects will be too late to boost declining flows, Wood Mackenzie Ltd. said. (5/7)
In Nigeria, allegations of contract inflation by international oil companies are generating ripples in the sector. Presidential sources hinted that top officials of multinational oil companies use their connections within the administration to secure oil and gas contracts at exorbitant rates when compared to costs of executing similar projects in other parts of the world. (5/9)
In Iran, the deputy oil minister for international affairs said a pipeline from southern Iran across the border to power stations in Basra province is currently under construction and that natural gas from Iran’s South Pars field may flow to Iraq this calendar year. (5/7)
Iran’s oil minister said last week that a contract with China National Petroleum Corp. for development of the South Azadegan oil field was torn up because the company wasn’t meeting Iran’s expectations at a field said to hold more than 40 billion barrels of oil. The minister said Tuesday there was a continued interest with working with Chinese companies, though the government was so far not happy with their performance. (5/7)
Iran, hampered by sanctions over its nuclear program, plans within four years to boost crude-output capacity by 1 million b/d at fields it shares with neighboring states. Iran is also pressing ahead with work at South Pars, part of a gas deposit straddling the border with Qatar. Tehran expects to complete several of the project’s 17 phases in about three years. The government is trying to attract foreign investment in crude, natural gas and chemicals production even as it seeks the removal of U.S. and European sanctions. (5/7)
Vietnam accused a Chinese energy company of operating in its waters illegally, potentially ratcheting up tensions further between the two countries. (5/6)
In Ecuador the national electoral council said that opponents of new oil development in a national park in the Amazon rain forest failed to submit enough valid signatures to force a nationwide referendum. The announcement appears to be a victory for President Rafael Correa and his plans to drill for oil. (5/7)
Colombian crude production sank to 935,000 b/d in April, a 20-month low, as Marxist rebel attacks and community protests curbed output amid continuing peace talks in Havana. Output slumped as repairs to the country’s second-largest pipeline following a March 25 rebel attack were prevented by the indigenous U’wa group. (5/6)
In Mexico officials said they expect to open bidding on the first round of private oil contracts in the first half of 2015. A constitutional reform passed last year opened the state-owned energy sector to private investment, but enabling legislation is still before congress. Assistant Energy Secretary Melgar said the first round of bidding is expected to offer a range of onshore, offshore and deep water fields. Melgar said Mexico hopes to have private companies producing a half million barrels of oil a day by 2018. (5/7)
Mexico expects an increase in crude-oil production in the next few years to come primarily from the reactivation of mature oil fields, which would be included along with other types of deposits in the first rounds of bidding involving private companies. (5/7)
Oil industry players like Exxon Mobil and OAO Rosneft risk wasting $1.1 trillion of investors’ cash through 2025 on expensive, uneconomic projects from the Arctic and deep seas to tar sands, according to a study by Carbon Tracker. The money risks being wasted as the total amount of oil the world can afford to burn without warming the planet to unsafe levels is available from less costly deposits that are economical at $75 a barrel. (5/8)
Pakistan plans to cut natural gas supply by around 150,000 Mcf/d to fertilizer plants and CNG pumps to increase electricity supply to cities facing daily rolling blackouts. (5/8)
The Ukraine crisis has become a “wake-up call” for European governments on the need to develop local energy resources, including natural gas from shale, the UK’s Energy Minister said. The use of hydraulic fracturing to tap shale reserves that could meet demand for decades would provide greater security of supply at a time when Russia has threatened to curb gas shipments needed to power European economies. (5/6)
The US drilling rig count edged up one unit to 1,855 rigs working during the week ended May 9, Baker Hughes reported. Oil rigs increased a unit to 1,528, with gas rigs unchanged at 323. (5/10)
The Obama administration began a process that may result in the first federal regulation of chemicals used in fracking. After three years of delay, the EPA said it’s considering rules requiring oilfield service companies such as Halliburton to send it details on the health and safety of the chemicals used. (5/10)
Startup company North Dakota LNG will begin construction this summer on a gas processing plant in Tioga, the first of its kind for the state. First phase operations will produce 10,000 gallons of LNG per day. Phase two operations, scheduled for 2015, will bring production levels to more than 76,000 gallons per day. LNG from the facility will be used for commercial fuel. (5/10)
North Dakota’s oil and gas workers are six times more likely to die on the job than their peers in other states as inexperienced workers join the state’s oil and gas boom, according to a report by the AFL-CIO labor federation. In North Dakota, 104 out of every 100,000 oil, gas and mining workers died of job-related injuries in 2012. North Dakota’s petroleum industry employed 40,856 people in 2011, up from 5,051 in 2005. (5/9)
Florida, the biggest gasoline market on the US East Coast, is enduring a supply squeeze and higher prices just a month before the start of the hurricane season. Surpassed only by California and Texas in gas consumption, Florida has no refineries and relies on tanker and barge deliveries for 97 percent of its supply. Retail gasoline has risen to the third-highest level ever seasonally and stockpiles are about 7 percent lower than a year ago. Florida’s fuel market underscores how the shale-oil revolution created winners and losers. (5/7)
Gulf of Mexico: Four years after the Macondo oil spill, BP has 11 rigs drilling in the US Gulf of Mexico, the most the company has ever had there at one time, BP America’s CEO said Monday. BP will spend $10 billion over the next five years in the deepwater US Gulf, which amounts to about 10% of its worldwide exploration and production budget and makes the company the largest investor in that arena. (5/6)
The US Transportation Department issued an emergency order designed to reduce the risks of transporting crude from North Dakota’s booming Bakken region by rail, a week after an oil train derailed and burned in Virginia. The order requires railroads to notify state emergency agencies when they haul Bakken crude through communities. (5/8)
Rail companies operating in the US should avoid using older DOT-111 tank cars to carry Bakken crude oil since that oil may be more prone to catch fire than other grades, the Department of Transportation said. (5/9)
The US EIA wants to start collecting information about the density of oil produced in the US to better inform the debate over lifting restrictions against crude exports. The agency would begin publishing the average API gravity and sulfur content of domestic crude oil on a state-by-state basis in December 2015. (5/7)
Methane leakage: according to a spate of recent scientific studies from the US and Australia, the shale gas industry has generated another formidable challenge: methane and radon leakage three times greater than expected. In some cases the volume of seeping methane, a greenhouse gas that traps heat 25 times more effectively than carbon dioxide, is so high it challenges the notion that shale gas can be a bridge to a cleaner energy future. (5/10)
Alaska Gov. Parnell signed a bill that aims to facilitate the construction of a natural gas pipeline and put that state in co-ownership of the project. Parnell’s signature moves the project to the preliminary engineering and design phase. (5/10)
According to EIA data, the recent natural gas plant liquids composite spot price —which approximates a value of NGL produced at processing plants—has hovered roughly halfway between WTI crude oil and gas spot prices. This liquids price premium has resulted in a faster growth rate of wet gas production compared with that of dry gas. (5/9)
The US Court of Appeals in Washington said the US EPA was within its discretion to tighten standards on fine particulate matter, or soot, from coal power plants, refineries, manufacturers and vehicles. The court struck down a challenge by the National Association of Manufacturers, which said the rule overreached. (5/10)
US coal exports: Even as it faces increased regulatory scrutiny at home, America’s coal is being embraced in one of the world’s cleanest energy markets: the European Union. At the biggest power plant in the U.K., a small black mountain of a million tons of coal sits at the base of a dozen 374-foot cooling towers. Much of it is high-sulfur coal from under the plains of Illinois and Indiana. (5/6)
President Barack Obama argued this week that the effects of climate changemust be confronted now, intensifying his focus on the issue a month before new and contentious rules are due out that will regulate emissions from existing power plants. Tuesday’s release of a report called the national climate assessment kick-started the administration’s push on an issue the president views as a key component of his legacy. (5/6)