Peak Oil Review - Mar 17

1. Oil and the Global Economy

Oil prices continued to fall for most of last week on concerns about growing inventories and weaker demand — particularly from China. On Friday, however, prices rebounded on concerns about the worsening Ukrainian situation and a new estimate from the IEA that global oil demand will increase this year as the economic situation improves. As the Ukrainian crisis is more likely to impact European rather than US energy supplies, London prices were up more on Friday with Brent closing at $108.57 and WTI at $98.89, leaving the spread at $9.19.

The impact of unusually harsh winter weather in North America, which seems to be continuing into the second half of March, is beginning to turn up in energy statistics. The EIA reported last week that the working stockpile of US natural gas was down to 1 trillion cubic feet as of March 7 after a weekly drop of 195 billion cubic feet. If drawdowns continue for the next three of four reporting periods at anything near recent rates, US natural gas stocks will be very low, especially in the hard hit northeast where weekly natural gas production was down 30 percent from the same period last year due to the weather.

The EIA is forecasting a robust comeback for the natural gas industry as soon as spring arrives. Even though US gas stocks will be well below 1 trillion cubic feet by the time rebuilding begins in April, the Administration is expecting a build of some 2.5 trillion cubic feet this summer. The EIA also is expecting a 2 percent increase in US natural gas production this year and little growth in demand.

North Dakota’s oil production has also been affected by the severe weather this winter. In December oil production was down by 50,000 b/d due to cold and snow. In January production rebounded by only 7,000 b/d to 933,000, still 43,000 b/d below November’s output. Twelve days of high winds in January severely limited the fracking of new wells in the state so that only 60 new wells were completed in the month. There now is a backlog of 660 new wells that have been drilled but are waiting to be completed. February and March also saw some severe weather in North Dakota so it will be June before we have a good picture of how much production was slowed by the winter weather. The EIA remains optimistic that these losses will be made up in the spring so that the US will see large increases in shale oil production in the next two years with total US production going from 7.5 million b/d in 2013 to 8.4 million in 2014, and to 9.2 million in 2015.

In its monthly Oil Market Report, the IEA reported that global oil production grew by 600,000 b/d in February largely thanks to a 500,000 b/d increase in Iraqi production. The Agency also increased its forecast of demand for oil in 2014 by 1.4 million b/d to 92.7 million b/d. The faster growth in demand is based on improving economies in non-OECD countries, particularly in Asia.

2. The Middle East & North Africa

Iran: Iran’s oil exports have been climbing since the interim 6- month agreement came into effect on January 20^th. The agreement calls for a cap of one million b/d on average during the period of the agreement. The IEA is reporting that Tehran’s exports reached 1.16 million b/d in January and likely were the same in February. Unless these are brought down in the next few months, the interim agreement and the prospects for a permanent nuclear agreement are threatened.

Rhetoric and posturing about Iran’s nuclear rights continue to come out of Tehran, but much of this is directed towards mollifying hardliners who see a deal with the West as a betrayal of the basic principles of the country’s governance. Included in last week’s rhetoric were claims that Iran’s security services are having great success in thwarting a continuing series of plots aimed at sabotaging the country’s nuclear industry.

Last week Iran signed a deal with Oman to send 10 billion cubic meters of Iranian gas through a new 150 mile pipeline which Muscat is to build build across the Gulf of Oman. Once in Oman, much of the gas will be converted to LNG for sale on the world markets. The agreement is a way for Iran to get its gas to market bypassing any sanctions restrictions and not having to invest any capital in very expensive liquefaction facilities.

Iran’s involvement in the Syrian uprising appears to be increasing. Tehran is recruiting Iraqi Shiites to fight for the Assad government in forces in Syria, bringing them to Iran for training, and returning the bodies of those killed in the fighting to Shiite cemeteries for burial. All this activity on behalf of Assad may eventually become involved in the nuclear and sanctions talks.

Iraq: Iraq is becoming two separate countries: the Sunni and Kurdish north where a full scale insurgency has driven some 400,000 refugees from Anbar province and the Shiite-dominated south which remains relatively peaceful and continues to set records for oil production. From Baghdad north we see some 30-40 suicide bombings and hundreds of casualties each month and radical Sunni forces occupying portions of major cities. The northern export pipeline is blown up frequently and the Kurds are going their own way in hopes that someday they will be able to break ties with Baghdad. Kurdistan’s new problem is the torrent of refugees from Sunni Anbar that are flooding into Kurdistan which is away from the Sunni-Shiite conflict and security remains relatively good.

The key question is how long these two Iraq’s can remain on their present course without the turmoil in the north spilling south so that it begins to damage oil production. This is an important question for during the next few years the only major increases in oil production on the horizon are to come from US shale oil and Iraq. Parliamentary elections are scheduled for late April, but with much of north in turmoil, these are unlikely to change the political balance in the country.

Libya: The partition of the country seems to be moving closer in the wake of the El Sider incident two weeks ago when a North Korean flagged tanker slipped into an eastern Libyan port, loaded a cargo of crude and got away in the face of some rather anemic gunfire from a hastily armed government tug boat. The Prime Minister, who never had much power anyway, was voted out of office by the congress and fled the country in the face of corruption charges.

The congress in Tripoli then sent militia from Misrata that are still loyal to the Tripoli government to seize the eastern ports from the Cyrenaica rebels, but they were stopped by a combination of rebels, militia, and army units. The Libyan air force seems to be on strike due to an unpopular change in leadership. To make matter worse, the Zintan militia from the western mountains which controls the flow of oil to the western terminals is unhappy over the ouster of the Prime Minister and has mobilized. On top of this, leaders of a southern province met to consider breaking away from Tripoli.

In short it appears we have near anarchy in Libya. There are no recent announcements as to how much oil is making its way out of the country – legally; however another ship is reported to on its way to El Sider to buy a cargo from the rebels that control the terminal.

Another major concern is the natural gas coming by pipeline from Libya to Italy. With Moscow making threats on Europe’s gas supplies as part of the posturing surrounding the Ukrainian situation, this source of gas becomes even more important.

Egypt: The security situation in the country continues to deteriorate with anti-government insurgents moving from eastern Sinai towards the Nile valley where they are in a better position to attack government targets. Over the weekend six government soldiers were killed in one attack adding to the 200 Egyptian security personnel have been killed since the overthrow of the Morsi government.

The Egyptian economy continues to slide with massive unemployment and a burgeoning energy crisis which is already causing rare winter blackouts and the shuttering of some businesses. Fears are rising about the lack of electricity during the hot summer months.

The election of Field Marshal Sisi to the Presidency in a one-sided election in which many opposition groups have been banned, looks like a sure thing. A Sisi government will face a host of problems ranging from the growing insurgency to Ethiopian plans to dam the Nile. Compared to the troubles in Libya, Syria, Iraq, and Yemen the Egyptian situation does not pose any immediate threat to oil shipments from the Middle East. While Egypt is no longer an exporter of oil or natural gas, the Suez Canal and its accompanying pipeline remain important to the movement of oil from the Gulf to the West.

3. Ukraine

With the landslide vote by ethnic Russians living in the Crimea to join the province to Russia once again, the possibility of a new crisis affecting global energy supplies has arisen. The result of the vote, which will only be recognized by Moscow, virtually insures that the Crimea will become part of Russia. Moscow already has enough troops in the province to forestall any military opposition by the Ukrainian government.

The situation could become even more serious, however, if Moscow repeats its Crimean takeover in other Ukrainian provinces that have a majority of ethnic Russians. While Moscow has been emphatic in saying that it has no designs on the eastern Ukraine, Crimea is dependent on other Ukrainian provinces for some of its water, gas and electricity and with no direct land access to Russia proper, maintaining vital services for the Crimea will be difficult without the cooperation of the Ukrainian government. The US is already accusing Moscow of fomenting unrest in Russian cities in eastern Ukraine.

The US, the EU, and possibly other countries have strongly condemned Moscow’s intervention and are planning sanctions against Russia. For its part, Moscow as announced that it will retaliate “asymmetrically” for any sanctions, which means it will attempt to hurt any sanctioning country with still harsher economic sanctions of its own. As Russia exports some 4 million barrels of crude and oil products a day to Europe and supplies about 30 percent of its natural gas consumption, Moscow in theory has considerable leverage over Europe. However, Russia’s economy has been weak for the last three years, and it is heavily dependent on its earnings from oil and gas exports to keep it afloat. So far, talk of sanctions by both sides have made not mention of restricting oil and gas supplies as both sides could be seriously hurt.

The exact nature of the sanctions imposed on Moscow will depend on developments in the next few days, but will likely start with travel bans on senior Russian officials and seizure of any assets they have in the West. Just as Ukraine can stop natural gas flowing into Crimea, provided Russia does not invade eastern Ukraine, Moscow can stop gas flowing into Ukraine. How all this plays out in the next few weeks will likely determine whether this crisis escalates into a major confrontation between Moscow and the outside world.

4. Quote of the Week

[In the Utica shale gas field] "There is pretty much a clear dry gas window developing. So if natural gas prices increase to where things are economic again, there will be some phenomenal dry gas wells in that dry gas window.”

— Larry Wickstrom, former chief geologist for Ohio’s Dept. of Natural Resources

5. The Briefs

East Africa’s oil and gas bonanza is changing the power dynamics of one of the poorest regions in the world, promising to free governments from long dependence on foreign aid once the billions of dollars in natural resource revenues start to flow. (3/11)
Much of the Niger Delta, heartland of the oil industry that supplies four-fifths of Nigeria’s state revenue and is now soiled by spills, is nearly uninhabitable from sabotage to oil pipelines and the subsequent contaminated waters. (3/15)
Nigeria may soon start a forensic audit of the accounts of the nation’s national oil company as President Goodluck Jonathan has approved the engagement of reputable international firms to handle the exercise of finding the missing $20 billion from oil sales. (3/13)
In Nigeria, the persistent fuel scarcity is taking its toll on the residents of the Nigerian capital, Abuja, as transport fare has increased by between 50 and 100 per cent. (3/11)
The World Bank said it won’t reconsider Venezuela’s request to review last year’s decision against it for seizing assets of ConocoPhillips in 2007. (3/14)
The Canadian government estimates production from its vast oil deposits should reach 5 million barrels per day by 2035, making Canada a “21st century energy superpower.” (3/14)
Canada, despite tough operating conditions, expects future projects to target its northern arctic waters, the head of the National Energy Board said. More than 100 wells were drilled in the Canadian waters of the Beaufort Sea since 1973, though only one was completed in the last 20 years. (3/13)
Royal Dutch Shell plans to lower spending in the Americas by a fifth as Europe’s largest oil producer focuses on more profitable operations. It’s “not acceptable” that Shell, now deploying about 36 percent or $80 billion of its capital in North America, has been losing money. (3/14)
Shell said Thursday it would separate some of its Americas downstream businesses and sell nonstrategic positions, as well as cut spending in its Americas upstream business by 20% this year, in a bid to improve returns. Shell and other major oil companies have struggled to profit from the explosion of shale oil and natural gas there. (3/13)
The US drilling rig count increased 17 units to 1,809 rigs working during the week ended Mar. 14, reported Baker Hughes. The 40-unit rise over the past 2 weeks has enabled the US the eclipse the 1,800 mark for the first time since December 2012. Oil rigs gained 18 units to 1,461 while gas rigs dropped a unit to 344. (3/15)
The Obama administration said it plans to sell 5 million barrels of crude from the US Strategic Petroleum Reserve in a test of the distribution system. The sale of less than 1 percent of the total stockpile has been scheduled for some time and isn’t tied to turmoil in Ukraine or other geopolitical events, said an Energy Department spokesman. (3/13)
Production from the Eagle Ford unconventional oil play in South Texas is expected to keep growing through 2014 and to break the 1.5 million b/d mark in 2015, according to Bentek Energy. (3/13)
To export US crude…or not? The ability of the US refining sector to absorb burgeoning domestic production, particularly from areas like the Bakken and Eagle Ford that are heavily slanted towards light, sweet crude, is likely to be a central focus of the debate over whether to lift US restrictions on crude oil exports. Many producers have warned that the US will soon be oversupplied with light crude, as the bulk of the US refinery system is optimized to take heavier oil. Without the ability to export crude, US production could be shut in, producers say. But some refiners, who are opposed to lifting the ban on exports, say they are rapidly adjusting their infrastructure to process lighter crudes and that fears of an upcoming crude glut in the US are overblown. (3/12)
The Association of American Railroads said 285 million barrels of crude oil were delivered on the U.S. rail system last year, an average of ¾ of a million barrels per day, a 74 percent increase from 2012. (3/15)
A major snarl in railroad traffic is ricocheting through the supply chains of businesses across the US, causing delays and losses for shippers of goods ranging from coal to sugar. Many of the problems stem from congestion on the BNSF Railway in a critical northern stretch of the country where it is shipping crude oil from North Dakota’s booming Bakken Shale region. (3/14)
Government officials in Albany County, NY, have issued a moratorium on Global Partners LP’s plans to increase the processing of Bakken crude oil at the Port of Albany pending a public health investigation. According to the order, the heating and storage of Bakken crude arriving at the port could pose a threat to the safety of county residents due to a combination of its extreme volatility and flammability as well as the inferiority of most of the tank cars used to rail those crude volumes into the county. (3/14)
US propane supplies were sufficient this winter, according to the National Propane Gas Association. The problem was a perfect storm of factors which limited sufficient distribution to where it was needed and when. (3/12)
US propane and propylene stocks fell 1.09 million barrels to 26.05 million barrels for the reporting week ended Friday, March 7. The draw was above market expectations. (3/13)
China Petroleum & Chemical, the country’s largest oil refiner, said Friday that it signed a long-term contract to buy liquefied petroleum gas, or propane, from a US refiner that spun off from ConocoPhillips. (3/14)
Oil companies are increasing California’s earthquake risk by injecting billions of gallons of oil and gas wastewater a year into hundreds of disposal wells near active faults around Los Angeles, Bakersfield and other major cities, according to a new report from Earthworks. (3/15)
In a year when California Democrats are worried about motivating their voters, Gov. Jerry Brown heard another unwelcome message Saturday: Some Democratic activists are bristling over his administration’s policies on hydraulic fracturing. (3/11)
Asian natural-gas buyers are being hit in the pocket by a combination of drought and heat in South America, as well as the coming World Cup soccer tournament. Liquefied natural gas available for sale on the spot market, which might normally be shipped to Asia by sea from the Atlantic basin, has for the past two months or so been snapped up by Brazil. The country needs to offset shortfalls in hydroelectricity output caused by dry weather. (3/15)
Saudi Aramco plans to produce 200 million cubic feet per day of unconventional natural gas by 2018 to supply a new phosphate project and a power plant, an industry source said. Saudi Arabia aims to develop shale gas for power generation in order to save more of its crude oil for export. (3/13)
The South Stream natural gas pipeline for Europe is making steady progress, Alexei Miller, chairman of Russian energy company Gazprom, said. The company plans to commission parts of South Stream before the end of 2015. The pipeline is designed to have an annual capacity of 2.2 trillion cubic feet. Gazprom envisions South Stream as a means to add diversity to an export market that depends on Soviet-era gas transit networks through Ukraine, where geopolitical tensions add a layer of risk to Russia’s export options. (3/13)
The European Union has slammed the brakes on two big Russian pipeline projects to supply more natural gas to Europe, as part of its efforts to turn up the heat on Moscow over its incursion into Crimea. The move will deal a blow to Russia’s ambitions of increasing its gas exports and bypassing Ukraine as a transit country. (3/13)
Russia’s intervention in Ukraine signals trouble for OAO‘s bid to buy Morgan Stanley‘s oil-trading unit, according to people involved in the deal and others familiar with the U.S. government’s approval process. (3/14)
Exxon Mobil Chairman Tillerson called on energy sector employees to embrace the industry’s policies, including more export opportunities. Tillerson told the North America’s Building Trade Unions “sound energy policies” like more natural gas exports could add as many as 452,000 new jobs for the U.S. market by 2035. (3/13)
Some Pennsylvania property owners are accusing Chesapeake of shortchanging them on royalty payments for pumping oil and gas from their land. The public outcry has grown so loud that Gov. Corbett wrote an open letter last month asking the state attorney general to investigate. (3/12)
Four Central European nations are urging the US to boost natural gas exports to Europe as a hedge against the risk that Russia could cut its supply of gas to Ukraine, but the White House says such a move would take more than a year. (3/12)
During the afternoon of January 7, 2014, six natural-gas fired generators in New England, totaling roughly 1,500 megawatts (MW) of capacity, were unable to procure natural gas to generate electric power. Of the five interstate pipelines serving New England that day, four were fully functioning with record throughputs while one was down due to a compressor failure. (3/12)
The polar vortex may give new life to aging coal and nuclear power plants in the U.S. Masses of arctic air rolling down from the North Pole have driven electricity prices to more than 10 times last year’s average in many parts of the country and have threatened some cities with winter blackouts. They’ve also emboldened energy companies to call for extending the lives of older and dirtier coal plants, as well as aging nuclear reactors. (3/10)
Japan’s nuclear power regulator has chosen two reactors in southwestern Japan as the first candidates for being restarted under new regulations meant to prevent another disaster like the one at Fukushima in 2011. (3/13)
Air pollution that has turned Paris skies a murky yellow is giving a break to millions of French travelers – all public transportation in the Paris region and two other cities is free for the next three days. (3/14)
In China, Premier Li said tackling air pollution was at the top of the government’s list. To attain this goal, a multi-pronged strategy is needed. One solution is to develop new energy vehicles, something easier said than done. (3/15)
Americans took 10.7 billion trips on public transportation last year—the highest annual public transit ridership number in 57 years. While vehicle miles traveled on roads went up 0.3%, public transportation use in 2013 increased by 1.1%. Since 1995 public transit ridership is up 37.2%, outpacing population growth, which is up 20.3%, and vehicle miles traveled, which is up 22.7%. (3/11)
The struggle to curb global warming is becoming increasingly fraught and costly, the head of the world’s leading climate science authority has warned. (3/12)