Quote of the Week
“From Capitol Hill to the Motor City, marble statehouses to mud strewn shale plays, lawmakers, policy wonks and industry leaders repeatedly invoke U.S. government energy forecasts to call for more drilling, more fracking and more nuclear plants. These predictions are made by the Energy Information Administration. They are ostensibly apolitical, certified with a federal seal of approval and are ripe fodder for the journalists, analysts and government agencies responsible for painting a picture of the country’s energy future. But in truth, some experts say, we’d have better luck calling Miss Cleo [than using EIA forecasts].”*
by Alan Newhauser, US News & World Report [Note: Miss Cleo is an American psychic]
1. Oil and the Global Economy
Oil prices fell through Thursday last week, but rebounded 5 percent on Friday after Baker Hughes reported that the US rig count had resumed falling; the EIA reported a larger drop in US crude inventories than analysts had been expecting; and the dollar which had been climbing recently turned lower. At the close Friday, New York futures were at $60.30 a barrel and London was at $65.56, about where they were at the beginning of the week. New York prices climbed 1.1 percent during April and London fell 1.8 percent suggesting that the recent price increases are peaking out.
The weekly stocks report also showed crude and gasoline inventories falling, which is normal for this time of year. The EIA has US crude production continuing to increase last week, but these numbers are based on modeling and have become suspect in recent months. Revised monthly oil production data for the US now has US production in January and February at roughly 9.4 million b/d, up from previous estimates of 9.2 and 9.3 million respectively. A new estimate for March US production is now at 9.5 million b/d although weekly reports had production at mid-month around 9.4 million b/d and then declining. This shows that even for the US, the Energy Department does not have a good fix on current production in times when prices and production are volatile.
Even the price at which oil, particularly shale oil, can be produced profitably is not well established. Some producers are saying that if US prices stabilize around $60-65 a barrel they can resume profitable drilling. Others, particularly observers outside the industry, say this is fiction and that much higher prices are needed to cover the true costs of producing shale oil.
A Reuters poll of 28 analysts working on oil says that prices will remain close to $61 a barrel for the remainder of the year due to an ample supply from the Middle East and a resurgence of US shale oil production. OPEC is widely expected to maintain current or possibly even higher production levels for the rest of the year.
US natural gas futures fell for five straight days last week as data suggests that a larger-than-expected glut is starting to accumulate despite increased use of gas by electricity producers. NY gas futures closed at $2.64 per million BTUs on Friday, down 12 percent since it closed at a four-month high on May 15th.
2. The Middle East & North Africa
It is starting to look as if the Assad government in Syria cannot last much longer. The Russians are pulling out their military advisors, aircraft maintenance and non-essential embassy personnel. Damascus is now dependent on Tehran and Moscow as its primary source of income — mostly through loans. An Islamist assault on the Alawite region along the northwest coast is expected soon. This will trigger the flight of many thousands of refugees into Lebanon. Hezbollah will be cut off from its supply line to Iran, and Tehran will have suffered a massive blow to its prestige and ability to maneuver in the region. Fighting among the insurgent groups can be expected to continue indefinitely.
Iraq no longer has much of an army and must rely on Shiite militia supported by Iran, Kurdish forces in the north, and coalition airpower to fight the highly motivated ISIL forces. Iraqi oil production is still doing well, but it seems only a matter of time until ISIL starts targeting the southern oil facilities. If and when ISIL moves on Baghdad or against the southern oilfields, either the West, or Iran, or possibly both will feel impelled to intervene with ground forces. The alternative would be the loss of most Iraqi oil production, which would drive global oil prices considerably higher.
The Iranian nuclear negotiations are nearing a climax. There is much optimism about a treaty and indeed the troubles Iran is facing in Syria, Iraq, and Yemen may force it to swallow national pride and make concessions or face continuing sanctions. There is still much opposition to the proposed agreement from Israel and its allies in the US, which still could derail the negotiations and send the region careening off in a new direction.
The civil war in Yemen continues to draw the Saudis more deeply into a military conflict. ISIL bombs are already going off in Saudi mosques and summer temperatures are rising in the country due to global warming. In Libya, ISIL is on the rise in the midst of the two-government civil war and oil exports keep rising and falling as the various factions fight for power. The only thing that is clear in all this is that there will be major changes in the geopolitical landscape across the region within the next few years, which are likely to affect oil exports. Should this turmoil make it into the Persian Gulf, some 17 million b/d of oil exports would be threatened. Without this oil the global economy would go into a tailspin.
Iraq/Syria: Heavy fighting continues in Anbar province as Shiite militia attempt to drive ISIL out of Ramadi and ISIL tries to drive the government out of their last major base in the province. ISIL has picked up its suicide bombing campaign in Baghdad with attacks on luxury hotels which is not good for business. The major issue surrounding the Iraqi situation at the minute is the US and other Western countries response to what seems like ISIL progress. The US and UK are sending more advisors and trainers, but the question remains how close they will be to the frontlines. Many in the US are advocating some 10,000 to 20,000 additional troops be sent to bolster Iraqi forces by providing special operations, intelligence and perhaps even artillery support. This, of course, would require much deeper involvement with Iranians who are essentially managing the Shiite defense of Baghdad right now. Major policy shifts are coming.
In Syria, ISIL and the slightly more moderate Islamic insurgents continue to make progress on several fronts and are gradually closing in on Damascus. The Assad government has few military resources left so its response to the insurgents’ progress has been to drop barrel bombs on the civilians living in recently captured towns. The government has lost control of the phosphate mines which provided a large share of its income. Food in the cities and refugee camps in becoming short as insurgent control over the countryside increases. Neither side is cooperating with humanitarian relief efforts. If reports that the Russians are bailing out are true, the first round of the Syrian civil war may be over before the year is out and a second round of struggle between ISIL and more moderate forces backed by major powers will begin.
Iran: Negotiations over the nuclear agreement took place in Geneva this past weekend. The six powers negotiating with Tehran seem to have agreed on a means to rapidly re-impose UN sanctions should the Iranians be caught violating the agreement. This has been a major sticking point, as China and Russia reflexively reject the idea of automatic sanctions and have the ability to drag out a vote on the re-imposition of sanctions indefinitely. Russia and China have not yet publicly stated their agreement to automatic imposition of sanctions.
Other hurdles to an agreement remain such as IAEA access to military installations and nuclear scientists as well as the pace of sanction relief which Tehran insists take place immediately. Tehran has been less than forthcoming about its past efforts to build nuclear weapons, as admission of such activity would undercut the mantra that the acquisition of nuclear weapons would be a violation of Islamic principles. Some are saying a self-imposed deadline to finish the talks makes no sense and that it would be far better to extend negotiations through the summer to insure that all the technical details are nailed down.
Libya: ISIL has been making significant gains in recent weeks raising much concern in the West. The problem is not that the ISIL has become that strong a fighting force, but that its opponents are so divided. Libya’s two governments control little but shifting alliances of tribal militias who are mostly concerned with getting a share of the oil revenue in a country which has little else left. ISIL now controls the city of Sirte but has been on the offensive recently to the south, east, and west, apparently with little or no opposition. Over the weekend an ISIL suicide bomber blew up a car at a checkpoint outside of Misrata killing five people.
As Libya approaches an economic collapse – it is living on its dwindling oil wealth from better times — the UN envoy is preparing a draft political deal that is hoped will bring the two governments together. This should be possible in face of the ISIL threat which both sides consider to be a foreign ideology attempting to takeover their country.
Plans are still under consideration in the EU to step up military activity along the Libyan coast in an effort to halt the flood of refugees by destroying the boats that people smugglers are using. The problem is that potential refugee boats are indistinguishable from thousands of fishing and small cargo boats until they start to fill with refugees. So far there seems to be no appetite in the EU to occupy the ports used by smugglers to prevent the formation of refugee groups and loading of refugee boats.
There was no news on Libyan oil production last week. Where Libya’s exports go in the future depends on a political settlement and the fortunes of ISIL-Libya in its effort to take over the country. A political settlement might bring enough stability to move oil production back above 1 million b/d again. However, a prolonged civil war between ISIL-Libya and other forces could further reduce exports. The only thing we can be sure of is that ISIL would have a hard time exporting oil should it take over any oil facilities.
Saudi Arabia/Yemen: The second bombing of a Shiite Mosque in Saudi Arabia is raising fears that we are seeing the beginning of a concerted ISIL effort to bring down the House of Saud. Security in Saudi Arabia is very tight by most standards, so that relatively unguarded Shiite mosques provide one of the few soft targets for suicide attacks. Some 2,300 young Saudis are believed to have made their way to Iraq and Syria to fight for the Islamic State and hundreds have made their way back to their homeland where they pose a continuing threat. Some 400 people have been arrested by the Saudi government in the past year for involvement with the terrorism. For the time being, Saudi oil facilities are well guarded and past efforts to attack them have come to naught.
With the end of the humanitarian ceasefire in Yemen last week heavy fighting resumed with Saudi airstrikes on Houthi targets and with Houthi artillery fire falling on Saudi border posts. The situation seems headed to yet another prolonged Middle Eastern civil war such as we already have in Libya, Syria, and Iraq. The major issue here is what a prolonged war will do to the House of Saud which is already the #2 enemy of ISIL right behind the Shiites and ahead of the “crusaders.” The drop in oil prices and the need to buy the quiescence of its people is already draining the national treasury. The global warming is bringing hotter than usual summer temperatures, which in turn require more Saudi oil production to run air conditioning. For now all we can say is the long-term outlook for the kingdom is not as good as it once was.
3. China
Despite numerous stimulus efforts mostly involving loan regulations and interest rates, China’s economy continues to slow, raising fears it may not reach it goal of a 7 percent growth in its GDP this year. The Purchasing Managers Index for April came in at just a hair above 50 suggesting that the economy is barely growing. Chinese crude imports continue to be strong, but the added oil may be going into strategic reserves or being refined in new refineries for export as finished oil products.
4. The Briefs
Exploration firms have made a rare run of oil and gas discoveries in recent weeks as more targeted search strategies bear fruit, but they offer little respite to a sector that remains severely bruised by the oil price slump. Seven successful discoveries with potential to become commercial have been made so far in 2015. That hope is somewhat dimmed by Norwegian-based consultancy Rystad Energy which said 2014 was the worst year on record for conventional oil and gas discoveries, with 78 finds with estimated reserves of 13.3 billion barrels of oil equivalent. (5/30)
Russia is calling on oil producers around the world to refrain from increasing output, Energy Minister Alexander Novak said on Friday, just days before he is due to meet officials from OPEC. The Russian economy has been hit hard by lower oil prices. (5/30)
China’s overall April crude imports rose 8.6 percent year on year to a record 7.4 million b/d. Crude imports from OPEC producers also hit a record high in April of 4.54 million b/d, up 8 percent year on year. It was the first time for China to surpass the US as the world’s biggest importer of crude oil. Russia moved up to China’s second-largest supplier in April, with deliveries up 26.4% year on year to 770,447 b/d. (5/25)
In China, state-owned energy giant China National Petroleum Corp (CNPC) has discovered more than 100 million tons of tight oil geological reserves in its Changqing field. The discovery, located in the western province of Shaanxi, is the first Chinese tight oil find to surpass 100 million tons, (5/27)
Saudi Arabia’s demand for oil products could increase by up to 20 percent this summer from last year as soaring temperatures stoke demand for power generation, but new refineries will limit the need for imports, traders and analysts said. Requirements for fuel oil, the cheapest form of oil used to generate electricity, could climb by up to 20 percent this year. (5/28)
Saudi Arabia’s state oil firm is on a hiring spree in South Korea, as the world’s top crude exporter seeks engineers to run plants in its soaring refining sector – setting it on course to compete with some Asian countries that are big oil buyers. Technicians from South Korea are an obvious target given that parts of its refining sector are struggling and the two countries also have long-established business ties across a range of areas including refining. Having little prior experience in refining, state oil firm Saudi Aramco is trying to lure experienced engineers and technicians from South Korea with generous expatriate packages. (5/29)
Iran will abolish a motorists’ allowance for heavily subsidized fuel and set a price, the deputy oil minister said on Sunday. President Rouhani, elected in 2013 on a platform of better economic management, has championed efforts to rationalize pricing and pushed through a modest increase in fuel prices last year. The government is trying to curb subsidies that have led to profligate energy consumption and put a strain on public finances. (5/25)
In Libya, Italian energy company Eni announced Tuesday it made its second discovery of the year, finding a natural gas and condensate prospect 85 miles off the coast. (5/27)
In Nigeria, the outgoing government has agreed to pay a debt of $800 million to resolve a months-long fuel crisis crippling the economy days before the inauguration of a new president in the country. Chaos reigned Tuesday at Nigerian airports where most flights were cancelled. Foreign airlines flew to other African countries to refuel. Banks started closing at lunchtime on Monday and cell phone companies warned they would be forced to shut down service countrywide for lack of diesel to fuel generators. (5/28)
In Angola, Total SA has chalked up 2 billion barrels of cumulative production from an offshore block in Angola located about 90 miles off the coast. The company claims Block 17 sets “a global benchmark” in deep water with 15 discoveries and a very high level of production.” (5/28)
Venezuela and Russia’s top oil producer, Rosneft, have agreed on around $14 billion in investment in the South American OPEC country’s oil and gas sector, President Maduro said Wednesday. The funds would be spent increasing Venezuela’s oil production; hopefully doubling it, though analysts doubt that goal is achievable. (5/28)
In Canada, firefighters were battling wildfires in northern Alberta, the nation’s biggest crude-producing region, for a sixth day on Thursday, with two blazes near oil sands facilities still out of control. The wildfires have forced producers in the Western Canadian province, the largest source of U.S. crude imports, to shut in 233,000 barrels per day of crude production, around 10 percent of total oil sands output. (5/29)
U.S. oil drilling rigs dropped another 13 rigs for the week ending May 29, the biggest drop in four weeks, showing that a near six-month slump in activity had yet to run its course despite a rebound in crude oil prices. That was the 25th straight weekly decline, bringing the oilrig count down to 646, down 60% from the peak. The combined gas and oil U.S. rig count stands at 875, down by 1045 rigs from the peak last fall. Last week’s cuts, however, included only two rigs working in the shale oil fields. A change of this size is perfectly normal as rigs are move around. (5/30)
In Texas, total crude oil production during March dropped by close to 2 percent from the previous month, data from the state energy regulator show. 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. In another sign of weakness, the Texas Railroad Commission said it issued a total of 848 drilling permits in April, down 56 percent year-on-year. (5/29)
Natural gas production in the Marcellus shale, which has grown over the past decade from next to nothing to the source of about a fifth of US output, may decline for the first time if prices in the basin remain low for much longer, according to the EIA. The agency says production in the fast-growing field in Pennsylvania and West Virginia is set to remain flat for the next few years before beginning a very slow decline, primarily because of depressed gas prices. (5/29)
In Pennsylvania, Gov. Wolf formed a Pipeline Infrastructure Task Force to help state agencies, natural gas producers, and communities closely work together as thousands of miles of new pipelines are proposed to move gas and related products from wellheads to markets. (5/30)
Alaskan lawmakers cheered a federal decision that clears the way to send liquefied natural gas from state ports to non-free trade markets in Asia. The U.S. Energy Department gave conditional consent for the Alaska LNG Project to ship LNG sourced from domestic reserves to countries that don’t have a free-trade deal with the United States. (5/30)
Santa Barbara oil spill: The federal government issued an order to Plains All American Pipeline to ensure the California coastline is restored after last week’s oil spill. As much as 2,500 barrels of oil was released from Line 901 in Santa Barbara last week, a pipeline owned and operated by Plains All American. About 500 barrels may have reached the waters off the coast of Refugio State Beach. (5/29)
In Seattle, protests began on May 14 when Royal Dutch Shell — bucking city residents and officials — docked its Polar Pioneer offshore. The towering 400-by-355-foot oilrig is en route to the Arctic, where it is scheduled to begin drilling operations this summer. The largest demonstration yet happened May 16, as hundreds of “kayak-tivists” swarmed Seattle’s Terminal 5, where the Polar Pioneer is docked. When Shell’s rig prepares to leave, the protesters will try to block it with their “Mosquito Fleet” of kayakers. (5/27)
The US EPA proposed renewable fuel quotas for 2014 that it said reflect the year’s actual biofuel use, and for 2015 and 2016 and, for biodiesel, quotas through 2017 that increase steadily over time. It proposed using authority granted by Congress to reduce quotas below federal Renewable Fuel Standard levels established under the 2007 Energy Independence and Security Act. (5/30)
Climate and oil: Several oil companies are ratcheting up their involvement in the debate over climate change as governments, activists, churches and some big investors gear up for a global summit on the issue at the end of the year in Paris. (5/25)
Climate change—not! The biggest U.S. oil producers have dismissed the prospect of joining their European peers in forging a common stance on climate change, with Exxon Mobil Corp.’s CEO saying he doesn’t intend to “fake it.” Exxon Mobil and Chevron Corp.’s go-it-alone strategy could weaken the impact of any targets, carbon goals or other climate-friendly measures endorsed by explorers including Royal Dutch Shell Plc, BP Plc and Total SA. (5/29)
Exxon-Mobil speaks: The CEO of one of the world’s largest oil companies downplayed the effects of climate change at his company’s annual meeting Wednesday and told shareholders his firm hadn’t invested in renewable energy because “We choose not to lose money on purpose.” (5/30)
Chevron’s CEO said the company would carefully vet the shoot down of proposals, at the recent annual meeting, to spend less on political maneuvering and more on environmental issues. (5/29)
Carbon sequestration showdown: The future of the most expensive fossil-fuel power plant built in the U.S. is facing new pressures after a Mississippi utility backed out of its commitment to the clean-coal project. South Mississippi Electric Power Association, which furnishes power to smaller utilities in the state, dropped its plan to buy a $600 million, 15 percent stake in the project spearheaded by Atlanta-based Southern Co. citing construction delays. Southern, in turn, notified state regulators that it may have to raise electricity rates for Mississippi power customers by 41%, or $37 a month for the typical household, to pay for the project.
West Virginia University researchers predict that, during the next two decades, state coal production will drop 39 percent compared with the industry’s last high point in 2008 – less-than-encouraging news for more than 1,800 coal miners who learned last week they would likely lose their jobs. (5/29)
