Peak Oil Review – Feb 22

Quote of the Week
 
About the proposed production freeze announced last week by Russia, Saudi Arabia, Qatar and Venezuela: “The four producers involved are already producing close to their peak. The freeze is the oil-market equivalent of calling for a cease-fire when they’re running out of ammo.”
Miswin Mahesh, an analyst at Barclays Plc in London
 
1.  Oil and the Global Economy
 
The oil markets climbed through Thursday last week in hopes that the Saudi-Russian “pact” to freeze oil output would lead to lower production and higher prices. After it became clear on Thursday that countries adhering to the pact were already pumping oil as fast as they could and had little to no interest in lowering production unless forced to by geology, the markets began to fall. In New York, where futures had traded close to $26 a barrel the week before last, prices peaked at nearly $32 before falling back to close Friday at $29.64.   London followed a similar pattern, climbing from $30 to nearly $36 before falling away to close at $32.91. This was the third mini price spike we have had in the past year based on stories that an agreement was in the offing that might cut production.
 
The fundamentals of oil still are not helping prices. US crude inventories were up by 2.1 million barrels the week before last; gasoline inventories were up by 3 million barrels; and distillates were up by 1.4 million. Offshore oil production in the US Gulf of Mexico is slated to reach record highs in 2017 as drillers continue work on projects too expensive to suspend even with the low oil prices. Russia announced that its January production, the level at which the freeze was based, was so good that if it can maintain that level through the year, 2016 production will be 1.9 percent higher than in 2015 despite the cap imposed by the pact. Iran says it is on track to increase production by another million b/d or more this year, and Iraq is looking to increase its output by 400,000 b/d. Bakken production was down by what can only be termed a measly 28,000 b/d in December, given the roughly 1.5 million b/d of excess production in the world.  China’s economy continues to be troublesome with foreign trade falling by more than expected in January. Crude oil imports in January were down by 4.6 percent from January 2015, and coal imports were down by 9 percent year over year.
 
As has been the case for many months now, the global oil industry continues to face a sea of troubles.  At the annual “CERA Week” conference at which the industry traditionally celebrates its triumphs of the past year, the tone will be entirely different. Shale oil drillers are facing $1.2 billion in interest payments in March and consulting firm Deloitte believes that one-third of US oil producers could go into bankruptcy this year. As the Wall Street Journal puts it: “The key question is: what will break first? Will it be the balance sheets of big US shale companies; the treasuries of Venezuela and Nigeria; or the resolve of Saudi Arabia?” 
 
The deepwater sector of the oil industry may be in more trouble than the shale oil producers.  Deepwater projects take years to complete and require hundreds of millions in investment before the first oil is produced. Projects of this size simply cannot be shut down as readily as shale oil producers can lay off workers and stack their rigs.  Most of these projects are being pushed to completion without the necessary revenues from other producing projects to pay for the drilling. Deepwater projects not yet started have been canceled or postponed for higher prices leaving much of the oil service business in serious trouble. If prices ever recover to the level that will support high-cost deepwater production, it will take two or more years to launch new projects and several more to complete them. With an exception of the new deepwater production coming on line in the next year or two, we can expect very little until the next decade, if ever.  The advent of peak oil certainly is turning out to be different from what many believed ten years ago.
 
US natural gas futures continued to fall last week due to over production, large inventories, and warmer weather forecasts ahead. From a high of $2.50 per million BTUs, (still about $4 lower than what many believe is the actual cost of production) in early January, prices have now fallen to $1.80. There are starting to be signs of slowing production despite the prospects of increasing exports of LNG and increased reliance on natural gas by the electric power industry.
 
2.  The Middle East & North Africa
 
Iran: Tehran made it clear last week that it should not be expected to adhere to the pact to freeze output until after it has surpassed its pre-sanction production levels of oil exports, effectively killing the whole plan. Iran’s oil minister suggested that he supports the initiative as a way of raising oil prices so long as somebody else does the freezing and Iran, which is very low-cost oil producer by today’s standards, is free to increase its exports. Iran is facing a critical election and the last thing it wants to do is nullify the  years of economic trauma over the nuclear issue that it has just been through.
 
Last week Iran sent its first oil shipment to Europe in three years. It seems that the concerns that Tehran would not be able in to insure its oil export cargoes due to continuing US sanctions are over. The chairman of the New York-based “American Club”, an insurer to the global shipping industry, said that Iran’s first export shipments are now being insured by his organization.
 
Syria/Iraq: Whenever it seems the Syrian situation can’t get any worse – it does. Syrian forces, backed by Russian airstrikes, continue to advance as does the Syrian Democratic Force an amalgam of Kurdish and other minority tribal militias.   Russia was claiming that the cease-fire negotiations in Geneva have been canceled, but Washington now says a “provisional agreement” has been reached. Assad is insisting that the rebels not use any ceasefire to regroup and rearm during the proposed halt of the Russian bombing.
 
The rapid Kurdish advance across northern Syria in the wake of the Russian air strikes that are dislodging rebel forces has raised a wedge between Washington and Ankara. The US supports the Kurds as the only viable military force fighting the Assad government and ISIL, but the Turks fear that the Kurds could eventually become powerful enough with their own recognized state to threaten the territorial integrity of Turkey. The Turks have already been firing artillery barrages against the Kurds in Syria and has warned them that they would face the “harshest reactions,” likely intervention by the Turkish ground forces, should they attempt to capture a Syrian town on the Turkish border.  The situation in Syria is collapsing into a can of worms with no clear path to a resolution.
 
The situation in Iraq is not much better. Baghdad and Erbil continue their arguments over the budget issue as they continue negotiations to allow the Kurds a piece of the total Iraqi oil exports in return for giving Baghdad the revenue from Kurdistan’s direct sales. As Erbil would likely be the winner in such a deal, the cash-strapped Iraqi government which is already running a massive deficit from the low oil prices has little incentive for a deal that would make its budget situation worse.  The outcome of all this could be a declaration of Kurdish independence which would be the first step in a partition of Iran and possibly someday Syria.
 
Somebody blew up the pipeline that the Kurds use to export their oil production to Turkey, causing a three-day outage. Baghdad announced its intention to increase oil production by 400,000 b/d this year despite Iran’s return to the oil markets.
 
Libya: The internationally recognized parliament in Tobruk voted to delay a vote on forming a government of national unity until February 23^rd, allowing more time to form a proposed cabinet. There is a controversy over who would hold the key position of Defense Minister in the unity government.
 
In the meantime, the US bombed an Islamic state camp at Sabratha, Libya, possibly killing 40 including the leaders of the group that murdered a group of foreign tourists in Tunisia. The strike, however, also appears to have killed two Serbian embassy employees who were being held hostage in the camp. Washington emphasized that the strikes were not the beginning of a prolonged aerial campaign against the Islamic state, but a continuation of a campaign against groups that were carrying out terrorist attacks.
 
Over the weekend, Islamic State militants carried out another attack on oil installations at Libya’s Ras Lanuf terminal. At least, two storage tanks were set on fire. Given that additional storage tanks were destroyed a few weeks ago, Libya’s oil export capability could be seriously degraded unless these attacks are stopped.
 
Saudi Arabia/Yemen: The war in Yemen continues with little progress being made on either side. So far the fighting has displaced some 2 million people and killed 5,700 including 2,500 civilians. According to the UN, some 14 million of the 23 million Yemenis are at risk of starving. The US continues to support the Saudi air strikes which have caused about two-thirds of the deaths. Washington recently approved the sale of $1.3 billion in military hardware to the Saudis including 22,000 bombs. In Southern Yemen Al Qaeda has seized the strategic coastal town of Ahwar while the government and the Saudis are busy fighting the Houthi insurgents.
 
The Saudis fear that a Houthi victory in Yemen would allow extremists to export their revolution to Saudi Arabia. However, concerns are starting to grow over the stability of the Kingdom in which the royal family remains in power by handing out generous benefits to its citizens to ensure that the population remains apolitical.  The decline in oil revenues obviously has become a major problem. Last week S&P downgraded the Saudis’ credit rating. The raters say the decline in oil prices will have a “marked and lasting impact” on the kingdom’s financial position. The government which is burning through its sovereign wealth fund at an alarming pace is attempting to sell revenue bonds to balance its budget and is considering selling off a portion of its crown jewel Saudi ARAMCO oil company. Some observers are starting to talk about the beginning of the end of the Saudi monarchy as its troubles mount.
 
The Saudis increased their oil exports in 2015 to 7.39 million b/d from 7.11 million in 2014. They continue to produce at what is probably close to capacity.
 
3.  China
 
In the fourth year of an expected 10-year term, doubts are rising on whether the Xi administration is up to the task of reforming the Chinese economy and restoring growth to the levels it has enjoyed for the past 30 years. Economic growth, while officially down to only 6.9 percent, is far more likely to be in the range of 4-6 percent based on internal data such as electricity consumption. Although the government denies a capital flight is taking place, outside observers say that capital is leaving the country at unprecedented rates, with many Chinese believing there is no future in their country. The government recently began suppressing data in its monthly financial reports that would indicate the size of the capital flight. Air pollution in Eastern China is cutting life spans markedly and it will take decades to reduce the heavy dependency on the coal and oil combustion which is causing the problem.
 
Currently, the government is trying to boost the economy by loosening the money supply. New bank loans in January reached a record $385 billion implying support from the government to the banks making the loans. With domestic growth slowing, cash-rich Chinese companies are on a buying spree to snap up foreign companies especially in the US. This is being done with the approval of the China’s government which must sign off on foreign exchange expenditures. The scale at which the purchases are being made has many members of Congress worried. The US Department of Treasury must also sign off on sales of American firms to China because of the security implications. A Chinese firm recently made an offer to purchase the Chicago Stock Exchange. An offer to buy Fairchild Semiconductor, an important defense contractor, was turned down by the company on expectations it would not pass government scrutiny.
 
China’s crude oil imports were down in January and likely will be lower in February due to the week-long New Year’s holiday during which little gets done in China.  Beijing’s crude imports have been erratic in the last couple of years as a slowing economy, the opening of large new refineries that are exporting oil products, and the desire to purchase cheap crude for the strategic reserve have all impacted China’s oil imports. Last week Sinopec shut down four aging oilfields as the crude was no longer economical to produce given current world prices.  It is the interplay of these factors that make it difficult to predict the pace of Chinese imports in the coming year.  
 
4. Russia/Ukraine
 
Moscow now says that a new freeze deal to limit oil production will be concluded by March. Unless such a deal includes Iraq and, more importantly, Iran it will be meaningless as these are the only two countries contemplating significant increases in production.  All oil exporting countries would like higher prices, but as most are already producing at close to maximum capacity, such a deal would be a symbolic one designed to show the willingness to cooperate with states such as Venezuela and Nigeria which are close to collapse from the low oil prices.
 
The ruble had a good week as its value is now closely tied to the price of oil.  Moscow’s agreement to participate in Venezuela’s production freeze last week was mostly show. but succeeded in pushing up the price of oil for a week or so, which given the size of Russia’s exports is worth quite a bit of money. Russia’s oil production is now at a post-Soviet high and some in Moscow are talking about a banner year for production. However, other in Moscow are warning that the opportunities for drilling in aging oil fields are fast running out and the sanctions have reduced the likelihood of significant amounts of offshore Arctic oil being produced in the next few years.  Russian oil production may slump 14 percent to 9.2 million b/day in the next five to ten years under a worst-case scenario prepared by the Energy Ministry.
 
The struggle between Russia and Ukraine continues. Both sides have now banned each other’s trucks from entering its territory. This will obviously not do much for trade between the two countries.
 
5.  The Briefs
 
Bankruptcy risk: Roughly a third of oil producers are at high risk of slipping into bankruptcy this year as low commodity prices crimp their access to cash and ability to cut debt, according to a study by Deloitte, the auditing and consulting firm. The report, based on a review of more than 500 publicly traded oil and natural gas exploration and production companies across the globe, highlights the deep unease permeating the energy sector as crude prices sit near their lowest levels in more than a decade, eroding margins, forcing budget cuts and thousands of layoffs. (2/16)
 
The European Commission presented an energy security package in Brussels that would equip the region with the tools necessary to transition to a low-carbon future while ensuring the region is secured from potential supply interruptions of conventional energy options like natural gas. (2/17)
 
UK shale oil: UK Oil & Gas Investments said oil was flowing “naturally” to the surface at a controlled rate of 456 barrels of oil per day from its well reaching 2,953 feet below London’s commuter belt, near the city’s second-busiest airport. Following the flow test in the Weald basin, UKOG will start the regulatory permit process so they can return to the well to seek to demonstrate sustainable commercial production. (2/17)
 
Norway’s economy barely expanded in the fourth quarter as consumer spending held up amid a plunge in oil prices. Mainland gross domestic product, which excludes oil, gas and shipping, grew 0.1 percent, after being revised to unchanged in the third quarter. Recession “is absolutely a risk,” said Erik Bruce, a senior economist at Nordea Bank in Oslo. (2/16)
 
Oilfield services firms who operate in high-cost oil and gas-producing regions such as the North Sea have been badly hammered. In such a poor market environment, it is no wonder that some oilfield services firms are looking at expanding their offerings into new sectors. A number of bigger oilfield services companies have recently announced deals in the renewables sector. (2/19)
 
Norwegian energy company Statoil announced the launch of a new $200 million investment fund to help drive a strong renewable energy growth strategy.  (2/17)
 
Russia’s Rosneft agreed to pay $500 million to Petroleos de Venezuela SA to increase its stake in their Petromonagas crude-processing joint venture. The deal will increase Rosneft’s stake in the upgrader that converts heavy oil into synthetic crude to 40 percent. (2/20)
 
In Iran, the chief executive of GE’s oil-and-gas business visited Tehran to explore business opportunities there, the first known visit by an energy executive of an American company since before Western sanctions were imposed on Iran over its nuclear program. (2/17)
 
In Beijing, the death rate from lung cancer in the heavily industrialized province surrounding has more than quadrupled in the last four decades, with researchers pointing to worsening air pollution as a likely culprit. (2/19)
 
In Ghana, President John Dramani Mahama has projected oil production to hit half a million barrels per day in 2020, up from its current production of 120,000 b/day. (2/17)
 
Nigeria’s crude oil operations at its Forcados export terminal were shut down after the rupture of a major underwater pipeline.  The Forcados unit in Delta State is one of Nigeria’s biggest terminals with capacity to export about 400,000 barrels of oil a day. Industry experts say repairing the pipeline might cost the country as much as 100 million dollars. (2/19)
 
In Angola, rebels in the oil-rich Cabinda region said they’re resuming an armed campaign to gain independence for the enclave after the government failed to respond to its request for talks. (2/20)
 
Venezuela’s central bank on Thursday released long-awaited data showing the depth of the OPEC country’s recession, a day after President Maduro announced a package of measures seen as insufficient to salvage the unraveling economy. Venezuela’s fuel – the world’s cheapest – will be increased in price for the first time in nearly 20 years. The bank reported that Venezuelan inflation hit 180.9 percent in 2015, one of the highest rates in the world, while the economy contracted 5.7 percent. (2/19)
 
In Alberta, Enbridge Inc. is looking for ways to reduce its dependence on oil-sands growth as a prolonged crude price collapse casts doubts over the future of projects in Western Canada. The pipeline company will seek to shift its focus after the current wave of projects draws to a close near the end of the decade. (2/20)
 
The US rig count fell by 27 to 514 last week, not that far from the low point of the 1998-99 down turn (488 units in late April 1999).  The oil rig count continued its relative freefall, down 26 to 413—that’s off 100 over the last three weeks—while gas rigs declined by 1 to 101, according to Baker Hughes.  The US offshore-rig count was 25 in the latest week, less than half the 54 rigs that were operating a year earlier. (2/20)
 
US Gulf of Mexico crude oil production is estimated to increase to record high levels in 2017, even as oil prices remain low. EIA projects GOM production will average 1.63 million b/d in 2016 and 1.79 million in 2017, reaching 1.91 million in December 2017. GOM production is expected to account for 18 percent and 21 percent of total forecast U.S. crude oil production in 2016 and 2017. (2/19)
 
GOM leases: The U.S. Bureau of Ocean Energy Management said it would offer up roughly 45 million acres for exploration development in the Gulf of Mexico through two lease sales in March. The sales mark the ninth and tenth such auctions covered in a five-year lease plan ending next year. (2/20)
 
GOM grief: Oil majors’ exit from pricey Gulf of Mexico projects, amid dozens of deferrals in deepwater exploration and production, is leaving one of oil’s most expensive sectors high and dry. Some companies are opting to not even try to make deepwater work. Conoco Phillips is pulling out, and 68 major projects to develop 27 billion barrels of oil equivalent have been put on hold. (2/18)
 
Financing: Energy companies are raising billions of dollars this year with new share offerings, tapping a receptive market despite last year’s poor stock performance and low oil prices. North American oil-and-gas producers have sold more than $5 billion of follow-on stock offerings during the first two months of 2016. (2/19)
 
Peril vs. production: As many as 74 U.S. oil and natural gas companies face significant difficulties in sustaining debt, according to Moody’s Investors Service. But the one thing the stress on companies hasn’t done is destroy production. Engineers have found ways to lower costs and boost output at oil wells, allowing cash-starved drillers to keep enough rigs active so that output is still within 5 percent of last year’s high. (2/19)
 
The US shale industry must come up with $1.2 billion in interest payments by the end of March as $30-a-barrel oil makes it harder for companies to scrape up the cash needed to stay current on their debts. Almost half of the interest is owed by companies with junk-rated credit, according to data compiled by Bloomberg on 61 companies. (2/18)
 
In North Dakota, where the rig count has dropped to 41, Whiting Petroleum Corp. is suspending plans to drill at 20 Bakken and Three Forks well sites as low oil prices continue to weigh heavily on the exploration and production company. Whiting is also shelving a gathering pipeline project it hired Tesoro Logistics to build. (2/20)
 
Hedging: U.S. oil producers reeling from an 18-month price rout have cautiously begun hedging future production this week, fearing this may be their best chance yet to lock in a $45 a barrel lifeline for 2017 and beyond. (2/19)
 
Gasoline futures are trading as if the U.S. economy is about to hit the brakes, according to Goldman Sachs Group Inc. (2/19)
 
Exxon Mobil Corp. failed to replace all of the oil and natural gas it pumped last year with new discoveries and acquisitions for the first time in more than two decades. Exxon’s so-called reserve-replacement ratio fell to 67 percent in 2015. (2/20)
 
Noble Energy swung to a multibillion-dollar loss as the oil-and-gas producer wrote down the value of assets amid the decline in energy prices. Still, excluding certain costs, Noble posted an unexpected profit on an adjusted basis, helped by cost cuts. (2/18)
 
OK quakes: A magnitude-5.1 quake was recorded on Saturday, February 13^thnear Fairview, about 100 miles north of Oklahoma City. The U.S. Geological Survey reported at least 9 minor earthquakes—up to a magnitude-3.9 quake—since the weekend in Oklahoma, a state wary of the connection between fracking and tremors. (2/16)
 
“Frack quake” suit: Environmental advocacy group Sierra Club said it filed a lawsuit against energy companies involved in Oklahoma shale in part because of the rise of earthquakes. (2/18)
 
US retail gasoline prices continue to fall, though, with oil production cuts on the table, the consumer may be enjoying the last of the savings. Motor club AAA reports a national average retail price for a gallon of gasoline at $1.69 forTuesday, 21 cents less than one month ago. (2/17)
 
CEO pay: 2015 was a tough year for oil driller Schlumberger. Unless you were the CEO. CEO Paal Kibsgaard received total compensation worth $18.3 million in 2015, the company reported, down only slightly from $18.5 million the year before. The rest of Schlumberger didn’t fare so well. The company cut 25,000 jobs during the year, or 20 percent of its workforce. Revenue was down 27 percent, and profit plunged 41 percent. (2/20)
 
Aliso Canyon well sealed: A leaking gas well near the US city of Los Angeles which has been polluting the air for four months has been “permanently sealed,” officials say. (2/19)
 
Demand for thermal coal is declining, a trend that appears to be “irreversible.” That is the conclusion from Goldman Sachs, which published a new report on the global coal and gas trade on February 15. For coal producers, this is the latest in a long line of grim warnings, all of which point to a future of shuttered power plants, mine closures, and bankruptcies. (2/19)
 
Railroad firm CSX expects coal volume to decline more than 20% in 2016 and most other markets to also decline year-over-year. (2/18)