Peak Oil Review – July 21

1.  Oil and the Global Economy
 
After falling to a low of $99 a barrel last Monday, New York oil futures rebounded at mid-week to close at $102.99 on Friday. London oil which fell as low as $105 a barrel, after hitting $115 in June, also rebounded to close at $107.24 after Ukrainian separatists shot down a passenger jet, greatly increasing tensions with Moscow. Oil traders have become remarkably blasé over the deteriorating situations in the Middle East, North Africa, and the Ukraine. The slightest “good” news such as the possible resumption of substantial Libyan oil exports is enough to send oil prices falling. The general sentiment in the financial press is that there is so much oil coming from US shale oil fields this summer and that the Saudis have so much reserve production capacity, there is no need to worry about the Middle East until oil production is imminently threatened.
 
The weekly stocks report showed US refining at the highest level in nine years leading to an unexpected drop in US crude inventories. Domestic production was supposed to be 78,000 b/d higher the week before last, but doubts about the EIA’s current production estimates continue. Much of the 36,000 b/d Bakken production increase reported for May was simply catching up for the four months last winter when Bakken production did not grow due to the cold weather. Even the most pessimistic analysts are expecting another year or two of growth in North Dakota tight oil production, but recent data suggests that growth is now confined mostly to one county – clearly not enough geography to fulfill growing Chinese demand and falling Middle Eastern production.
 
US natural gas prices took another tumble last week as mild summer weather in the northern US cut air conditioning demand. Futures prices, which hit nearly $4.90 per million BTU’s in mid-June, are now down at $3.95. The drop was precipitated by unusually large injections of natural gas into storage for this time of year. Weather forecasts show temperatures as much as 10 degrees below normal in many large US cities with no sign of change in the near future.
 
Last week the EIA held its annual energy conference in Washington. This year seemed to be heavy on industry spokesmen warning of dire consequences if Washington didn’t lift the ban on crude exports or stop imposing environmental regulations. The Executive Director of the International Energy Agency, however, warned the attendees that while oil and natural gas are now abundant, this situation will not last much beyond the 2030s. In the last few years, the IEA has become very bullish on the mid-term prospects for the US shale oil and gas industries. Most do not see much shale oil production beyond this decade.
  
2.  The Middle East & North Africa
 
The Region:  The extent of the chaos currently engulfing the Middle East and its likely impact on the region’s oil exports has yet to be fully grasped. While oil traders cite the prospects of renewed Libyan oil exports and anticipated increases in Iraqi oil production as reasons for optimism about world oil supplies, these are almost certain to be short-lived. In recent weeks we have seen the beginning of a no-holds-barred Sunni-Shiite war that could easily continue for decades. Although Saudi oil exports are generally considered safe, the Saudi-Iraqi border is no longer controlled by Baghdad in any meaningful way. In the past week, Riyadh has moved forces to the border and is reported to be increasingly concerned about the ISIS in Iraq who doesn’t like the hereditary Gulf rulers any more than they like Shiites or Christians.
 
The Iranians are being increasingly drawn into this mess by simultaneously supporting Hezbollah in Lebanon, Assad in Syria, Hamas in Gaza against the Israelis, and Maliki in Iraq against the Sunnis. This is becoming a tall order for an oil exporter whose revenues have been cut in half by the embargo.
 
The region also has some overriding problems that will be of increasing concern in the next few years. The Middle East is running out of water and global temperatures are rising. The ISIS will shortly control most of Iraq’s water supply and Ethiopia is working on damming the Nile. Yemen on the Saudi border is becoming increasingly chaotic and insurgencies are budding across North Africa.
 
Complacency about oil exports in the midst of all this is clearly unwise. It is highly unlikely that we will see the end to the turmoil in the immediate future or that Middle Eastern oil exports will continue at their current pace much longer.
 
Iraq: Baghdad’s troubles continue on numerous fronts with most observers saying the country is literally falling apart. This, of course, accounts for the reluctance of Washington to become heavily involved in the chaotic situation. A recent Pentagon report says that Iraq’s armed forces are so compromised with Sunni infiltrators and radical anti-US Shiites that it would be unwise to station US advisors with many units. Sunni bombs continue to go off in Baghdad, and ISIS rebels continue to creep closer to the capitol while beating off the government’s efforts to recapture towns on the highway north of Baghdad.
 
The Kurds have started to move oil from the disputed Kirkuk oilfields to Kurdistan, while Tehran has banned tanker loads of Kurdish oil from entering Iran. Baghdad continues to denounce the Kurds’ “theft” of Iraqi oil from the Kirkuk fields as well as Erbil’s independent export of oil via Turkey. The Kurds hope to increase their exports from the current 120,000 b/d to 400,000 by the end of the year. They are warning that when the ISIS militants finish with Baghdad, they will attack Kurdistan and are asking for international help. In the areas of Iraq and Syria occupied by the ISIS, the new rulers are enforcing harsh Islamic policies including driving the Christians out of Mosel under penalty of death and repressing Turks, Kurds, and other ethnic minorities living there.  
 
Baghdad’s inability to form a unity government with the Kurds and Sunnis means that Kurdistan may be declaring independence soon. The Iraqi parliament, however, has elected a new speaker and the constitution requires that a new government be formed in the next two weeks. With the widely disliked Maliki vying for a third term against the wishes of many powerful Shiites, it is hard to predict how this will turn out or even whether a new government can be formed.
 
As has been apparent for many weeks the situation is deteriorating and with it the prospects that Iraqi oil exports will continue at present or planned levels.
 
Libya: With fighting continuing over the weekend at Tripoli’s main airport, many of its domestic aircraft destroyed, and air traffic control unworkable in the country, it is hard to foresee much future for the country.  A spokesman for the government said oil production on Wednesday was at 600,000 b/d, but was falling. While oil may be coming out of the ground, there is little indication that much exporting is taking place and there are reports of storage tanks nearing capacity.
 
With the closure of air travel, many companies and the UN are evacuating their personnel by road to Tunisia. The Philippines has ordered 13,000 of its nationals to leave the country and other countries are expected to do likewise. The “government” in Tripoli is asking the UN for help in controlling the lawlessness. On Saturday an unknown militant group attacked an Egyptian border checking point killing 22 Egyptian soldiers stationed there. Egypt is vowing retaliation.
 
As with Iraq, Libya is not likely to remain a single country much longer and could devolve into three or more states. How oil exports make out in all this is anybody’s guess, but is seems likely that not much oil is going to be exported while so much shooting is going on.
 
Iran:  The nuclear talks were given a four-month extension last week amid reports of progress and the emergence of major stumbling blocks. The Obama administration seems satisfied with the progress of the talks while hardliners in Congress and elsewhere are calling for more pressure in the form of tighter sanctions and threats of military action to be applied to Tehran. With the rapidly changing situation in Syria and Iran, the specter of direct, large-scale Iranian military intervention against the ISIS is increasing. For now, this is only likely in the event that Baghdad collapses or the sacred Shiite shrines are threatened by the ISIS. Such an Iranian intervention would likely set off a series of repercussions.
 
Washington says it is content with the 1 to 1.1 million b/d that Iran is currently exporting. Tehran denied a report from the IEA that its exports were down by as much as 36 percent last month. China has cut its imports by 36 percent in the last two months to 510,000 b/d and India has cut 29 percent to 141,000 b/d, but the Iranians say all is according to contract.  
 
OPEC says that the sanctions have cut Iran’s oil export revenue in half during the last two years. With very little relief coming during the negotiations, Iran’s economy is not in good shape at a time when it is taking on increased international obligations to support its brethren Shiites in Syria, Iraq, Lebanon, and Bahrain. This does not even include the problems of supporting Gaza’s Hamas in its burgeoning little war with the Israelis. Whether all this congeals into more concessions at the nuclear bargaining table remains to be seen. In the meantime we should not expect to see increases in Iranian oil exports this year.
 
3. Ukraine
 
The situation went from bad to worse last week with the downing of a Malaysian airliner by Russian-supported insurgents in Eastern Ukraine.  Moscow denies involvement in the shoot-down despite considerable circumstantial evidence of its complicity. Last week, the US announced another round of sanctions including ones on Russian oil and gas firms mostly involving financing of oil and gas projects. The EU which has a far larger bilateral trade with Russia including purchase of nearly a third of the region’s natural gas supply has been far more reluctant to impose meaningful sanctions.
 
In the last 20 years, the Russian and European economies have become so economically bound that imposition of serious economic sanctions on Moscow would result in serious problems for the EU.  Russia is moving to increase its gas and oil exports to Asia which is not so sensitive about what it does in the Ukraine, but for the time being, Moscow is dependent on exports to Europe and loans from European banks to keep its economy functioning.
 
Following the shoot down and Moscow’s dissembling on its involvement, the EU is preparing yet another round of sanctions on Russia that go much further than before. For its part, Moscow has been announcing counter sanctions, but short of cutting natural gas sales to the EU or slowing purchases, there is little it can do. Europe’s banks have been pivotal in financing Russian economic growth so that by cutting loans, the EU can bring considerable economic pressure on Moscow.
 
Where all this goes also is difficult to predict.  So far there has been little impact on oil and gas exports other than to the Ukraine which has been cut off by Moscow. In the long run, Moscow is clearly looking to sell as much of its gas and oil as it can to China and other Asian nations.  
  
4.  Quote of the Week

• “Bakken oil production will continue to rise to reach 2 million barrels a day.”

                                     — Eric Slifka, CEO who ships Bakken oil by rail 

5.  The Briefs
OPEC, in its annual statistical report, said its collective crude production was down 2.5 percent during 2013 and its share of total global production in 2013 averaged 43.4 percent, down from 44.6 percent in 2012. The group said in early July demand for its oil will continue to decline next year when it is likely to fall by 300,000 barrels a day. (7/19)

• OPEC said Asia-Pacific economies imported an average 14.3 million barrels of its crude per day in 2013, or 59.3 percent of the oil exported by member states. (7/19)
• Saudi Arabia, the world’s biggest oil exporter, shipped 6.99 million b/d in May, the least crude in almost three years and down from 7.45 million  a month earlier as domestic refineries processed record amounts and power plants also increased consumption. Crude production rose to 9.71 million b/d from 9.66 million in April. (7/19)
• The Yemeni Oil Ministry said restive tribesmen in Marib province attacked an oil pipeline, cutting exports to a Red Sea terminal. Tribesmen in an area thought to be under the influence of al-Qaida fighters targeted the 100,000 b/d pipeline to the Ras Isa export terminal Saturday. (7/15)
• In Egypt it was a surprise when President Abdel Fattah el-Sisi, as one of his first major policy initiatives, sharply raised fuel prices two weeks ago, cutting deeply into energy subsidies. Even more surprising, perhaps, has been the absence of widespread civil unrest. The relative quiet appeared to signal an acknowledgment among many Egyptians that the fuel prices, which were among the lowest in the world, could not stay that way forever in a battered economy. (7/18)
• In Nigeria, scarcity of aviation fuel has paralyzed flight operations, leading to delays and cancellation of flights. The non-availability of the product started a few days ago.  Sources blame traffic gridlock slowing deliveries from fuel depots to the airport. (7/16)
• China National Petroleum Corp. announced it completed drilling and exploration activity in waters of the South China Sea disputed with Vietnam and pulled its rig out of the area. The May deployment of the CNPC rig sparked international concerns over China’s claims to regional maritime territory. (7/18)
• In Cuba, Russian President Vladimir Putin said at the conclusion of a regional visit his government would help Cuba’s state oil company develop offshore reserves.(7/15)
• Trinidad and Tobago’s state-owned Petrotrin is blaming the shale oil revolution in the US and lower crude prices at Cushing, Okla., for its decision to significantly reduce its refinery throughput to 120,000 b/d from 180,000. The decision was an attempt to limit the company’s losses at its Point a Pierre refinery and to avoid going out of business like two other Caribbean refineries. (7/17)
• Mexico’s Senate voted Friday to give Mexican companies a greater role in energy projects under the landmark opening of the country’s oil and gas sectors, tightening the national content rules that President Peña Nieto had proposed and partly satisfying demands of local industry groups and ruling party members. The Senate set a bar of 25 percent mandatory Mexican content in each new energy project starting from 2015, progressively increasing that to at least 35% by 2025. The rules for deep waters will be set later. (7/19)
• Oil spill identified: Canadian Natural Resources Ltd. said a steam-injection practice at an oil extraction site in Alberta may have led to the 12,000 barrel oil spill there last year. The oil seeped from the company’s exploration areas near the Cold Lake Air Weapons Range in Alberta last year. (7/16)
• The US drilling rig count dropped 4 units to settle at 1,871 rigs working during the week ended July 18, Baker Hughes reported. Gas rigs rose 4 units to 315, while oil rigs fell by 9 to 1,554. Canada’s rig count climbed 66 units to 381, a 57-unit gain from this week a year ago; oil rigs grew 48 units to 226 while gas rigs increased 18 units to 155. (7/19)
• Oil and gas drilling off seven Atlantic Coast states moved a step closer for the first time in decades when the Obama Administration established guidelines for seismic testing that would gauge offshore reserves. However, the decision doesn’t yet authorize the tests, done by ships towing guns that blast high intensity sound waves into the water.  (7/19)
• US condensate exports: Two US Commerce Department rulings giving a pair of Eagle Ford players legal backing to export processed condensate have been viewed as a dramatic loosening of America’s 40-year ban on crude exports, or at least a sign that long-awaited export policy changes were near. But according to the lawyer for one of the firms, the effect of these decisions has been vastly overstated. The rulings impact a very specific type of condensate, processed through very specific facilities, and really nothing more. (7/19)
• Oil companies and railroads have offered U.S. regulators a proposal for a tougher tank-car design, with steel shells a half-inch thick, and a three-year plan to phase out older model rail cars, according to two people involved in the talks. (7/15)
• North Dakota expects output to surge from June through August as more benign weather gives extra time to work in the field. Output rose about 3.6 percent to 1.04 million barrels a day in May, the state’s Department of Mineral Resources reported yesterday. It was the largest increase since August. (7/15)
• North Dakota oil production continued to climb in May but new requirements in the state’s flaringreduction plan slowed permitting activity in June and may lead to production curtailments for some operators early next year. (7/17)
• In western North Dakota, the heart of the state’s oil boom, more federal drug enforcement agents are needed, Sen. John Hoeven said. (7/17)
• Biofuels: the U.S. Energy Department said it was spending $6.3 million on research aimed at generating a biofuel that could be cost competitive by 2017. The Energy Department said it wants to produce a drop-in biofuel that would cost about $3 per gallon by 2017. (7/17)
• California regulators authorized the reopening of two wastewater disposal injection wells, out of 11 ordered temporarily shut two weeks ago on fears of potential pollution to underground water sources in Kern County. There are more than 1,500 such wells in California. (7/19)
• Petroleum engineers are among the best paid professionals in the United States. Only chief executives and some specialist doctors earned more last year, according to federal government pay data. Between 2003 and 2013, pay for engineers with a specialization in petroleum soared almost 60 percent compared with an average increase of just 25 percent across the whole economy. (7/18)
• A discovery by Shell in the deep waters of the Gulf of Mexico, in the Rydberg area of the Norphlet play, is a milestone for a partnership that includes the US subsidiary of Colombian energy company Ecoptrol and Nexen, a subsidiary of China National Offshore Oil Corp. The latest discovery brings Shell’s total potential discoveries in the Norphlet play to more than 700 million barrels of oil equivalent. (7/17)
• Whiting Petroleum said it would buy Kodiak Oil & Gas for $3.8 billion in stock plus the assumption of $2.2 billion in debt, creating the largest producer in the Bakken Shale and Three Forks formations. The two companies together produced 107,000 barrels a day of oil equivalent in North Dakota and Montana in the first quarter. (7/14)
• Offshore Israel, the partners developing the giant Leviathan gas field said an audit by a Dutch consulting company put the reserve estimate at 21.9 trillion cubic feet, up from the previous estimate of around 18.9 trillion cubic feet. Leviathan should go onstream in 2016, with much of the offshore field’s reserves already designated for exports to regional customers. (7/15)
• Lebanon’s government postponed an offshore natural gas auction after rancor erupted over the amount of revenue Beirut would get. (7/16)
• In Syria, fighters from the self-declared jihadist group the Islamic State have seized a gas field in the desert region of Palmyra in the central province of Homs. The fighters on Thursday morning attacked the Shaer gas field east of the ancient site of Palmyra killing many of the guards and workers. (7/18)
• Ukraine: some of the proposals offered to break the Russian grip on the Ukrainian energy sector are working. Ukraine is meeting its energy needs with domestic sources and alternative suppliers. Some of its neighbors have reversed gas flows toward Ukraine as well. (7/18)
• US LNG exports: French energy company EDF agreed to buy liquefied natural gas from an export facility being developed in Texas by Corpus Christi Liquefaction. The agreement lasts for 20 years and exports are expected to begin in 2019. (7/19)
• The city council in Denton, a North Texas city that sits atop a large natural gas reserve, rejected by a 5-2 vote early Wednesday morning a petition to ban further permitting of hydraulic fracturing in the community after eight hours of public testimony. The proposal will be sent to a public ballot in November. (7/16)
• US utilities are scrambling for coal and are on pace to increase imports 26 percent this year, as railroad bottlenecks slow deliveries and electricity demand climbs with an improving economy. Russian coal, a source of imports, appeals to power producers because it emits less sulfur than other coals, making it easier to comply with environmental rules, and also has a high heat content. U.S. utilities burned 30 million tons of coal inventories in the first quarter. March was the coldest for the month since 2002 in the US, boosting power demand. Companies in the US are finding bargains overseas because the world is currently oversupplied as China cuts imports. (7/16)
• US power consumption peaked in 2006 and has flat-lined since. Consumption peaks normally come in late July/early August, so it is still a bit early to gauge how 2014 is shaping up. However historical consumption suggests that the US economy at best continues to muddle along, despite an unprecedented amount of policy stimulus – some of which may even be curtailed before the end of the year. (7/15)
• China’s once insatiable appetite for coal is cooling, raising questions about mining companies’ big bets on new projects. Analysis shows sharply weaker demand, which experts say stems from slowing growth. Longer term, factors including new policies to curb air pollution by limiting coal use are likely to keep growth in coal consumption far below the double-digit increases of the past. (7/15)
• India’s biggest power company said coal shortages at six of its power stations are threatening to disrupt electricity generation in 22 of the country’s states and territories.  The shortages–mainly because of failures by the state-run coal monopoly to deliver adequate supplies–are a major cause of power outages in India, where more than half of electricity-generation capacity depends on coal. (7/18)
• Opposition politicians and environmentalists in Australia reacted with dismay Thursday to the country’s repeal of laws requiring large companies to pay for carbon emissions, saying that it made Australia the first country to reverse progress on fighting climate change. The Senate voted 39 to 32 on Thursday to repeal the carbon tax after Prime Minister Tony Abbott’s conservative government secured the support of a number of independent senators. (7/18)
• A climate protection plan from Beijing should be finalized by early next year, a director at the National Development and Reform Commission said. China is the world leader in emissions. Beijing says it’s readjusted its economic structure in a way that promotes green energy and a low-carbon economy in an effort to combat climate change.  (7/17)
• China is mandating that electric cars make up at least 30 percent of government vehicle purchases by 2016. China is stepping up support for electric vehicles as demand lags behind its target because of consumer concerns over price, reliability and convenience. (7/14)
• Inefficient USA: The American Council for an Energy-Efficient Economy ranked the United States 13th out of 16 major economies it reviewed on energy efficiency indices. The European Union as a whole ranked No. 3, with Germany taking the top spot. The 16 economies rated by ACEEE make up 81 percent of the global gross domestic product and more than 70 percent of the global electricity consumption. (7/19)
• States are allotting a growing share of the funds they raise from gas taxes to debt service and spending unrelated to roads and bridges, making them more reliant on federal assistance to pay for new infrastructure. The shrinking pot of state cash is one reason why governors increasingly are in a panic over a congressional impasse about replenishing the federal Highway Trust Fund. (7/17)
• Toyota, among carmakers developing driverless technology, said the appeal of autonomous cars carries the risk of adding to urban sprawl and pollution as they may encourage commuters to travel farther to work. (7/17)