Peak oil review - Sept 15

1. Oil and the Global Economy

Oil prices dropped once again last week with London’s Brent hitting the lowest in more than two years, closing on Friday at $97.11 a barrel. New York oil futures were more volatile, but closed at $97.27, leaving the WTI-Brent spread at $4.84. As has been the case for the last three months, generally weak demand and ample production has been overwhelming fears of supply disruptions stemming from the Middle East or Russia. Last week all the major report agencies – the EIA, IEA, and OPEC – reported that they had cut forecasts of global consumption for the remainder of the year and on into 2015.

The EIA reported that the US produced 8.59 million b/d the week before last, which was down a bit from the preceding week, but was 845,000 b/d more that during the same week last year. It is this continuing growth in US shale oil production that is keeping the markets well supplied and has cut US oil imports by about 6.8 percent from last year. Imports of Canadian oil into the US are up 27 percent from last year.

Last week’s US stocks report showed that while US refining was still relatively strong, inventories of distillates had increased by 4 million barrels and stocks of gasoline by 2.4 million. Total US fuel consumption was down by 6.8 percent to 18.6 million barrels, the least since June. China’s factory production fell to the lowest in six years in August. Beijing, however, has been taking advantage of the relatively low oil prices to add an unknown quantity of crude to its growing strategic reserves. This makes judging China’s consumption more difficult, but presumably lower factory production translates into less oil consumption.

US natural gas prices were up slightly for the week to close at $3.85 per million. Prices fell on Thursday after a government natural gas storage report showed inventories increasing by more than analysts had expected. Bernstein Research says it has cut its 2015 price forecast to $4 per million from $4.50. Bernstein says that US natural gas production will grow by 3 billion cf/d next year while demand, largely driven by the closure of coal fired power stations, will grow by only 1.2 billion. US natural gas production in the first half of 2014 grew by 4.1 billion cf/d over the first half of last year.

2. The Middle East & North Africa

Iraq: US airstrikes against selected IS targets in Iraq continued last week as Washington stepped up its efforts to build a coalition to defeat the Islamic movement. US pressure on Baghdad to form a workable coalition government continues. The Kurds have agreed to join, provided a lengthy list of demands is agreed to by the majority Shiite government. Iraq’s new prime minister has ordered his forces to stop indiscriminate shelling and bombing of Sunni civilian neighborhoods in areas controlled by the IS. Meaningful Sunni participation in the new government is still an open question.

Washington’s efforts to build a coalition to confront the IS is meeting mixed results; however, continued IS atrocities are drawing in more countries. A few are willing to aid in the bombing of IS targets, or supply special forces personnel as trainers and for limited operations while a few Arab states are willing to provide bases or humanitarian support. Turkey is obviously in the best position to support a war on the IS, but there are some 40 Turkish diplomats in IS hands and the Turks have concerns about the Kurds and their long-standing demands for a significant piece of Turkish territory.

For now oil supplies from southern Iraq seem safe from the fighting and it seems likely that the coalition forming against the IS will enable the Iraqis and Kurds to recover the northern oilfields and get them back into operation. The thorny issues of Kurdish control of the northern oilfields they occupied after the IS drove out Baghdad’s forces, and direct Kurdish sales of oil remain to be settled.

Libya: With very little foreign presence in Tripoli, the news is sporadic and contradictory. The Islamists who took over the capital several weeks ago are supposed to have ransacked the ministries and little work is being accomplished. The Islamists have set up their parliament in Tripoli, while the last elected one is hiding out on a Greek car ferry anchored at Tobruk near the Egyptian border.

The Libyan National Oil Company says oil production now has risen to 810,000 b/d. Libya’s prime minister, who is running around the Gulf trying to raise support for foreign intervention, claims the oil industry remains under government control and expects to increase production to 1 million b/d in October. For several weeks now there have been reports of major oil fields and export terminals reopening and the financial press seems to have seized on the notion that Libya is back in the oil business. The EIA acknowledges that while most oil fields and terminals have reopened, it is doubtful, given the turmoil, exports will regain previous or even significant levels in the near future.

What little reporting there is regarding actual exports as opposed to government announcements suggests that only the occasional tanker is loading and that exports are far from the hundreds of thousands of barrels per day that has made it into the financial press. Whatever foreigners are left in the country are trying to get out and there is little indication that normal financial transactions are continuing, although the central bank is said to be collecting the revenue for whatever oil is being exported. Over the weekend, the head of the central bank was fired by the parliament meeting in Tobruk.

Iran: Iran’s involvement with the world is becoming increasingly complex. Despite Tehran’s deep involvement in the fighting against the IS in Iraq and Syria, the West is refusing to let Iran be part of the anti-IS coalition because of its support for Assad, efforts to turn Iraq into a Shiite state, and intransigence over the nuclear issue. Iran’s President Rouhani says the new coalition will have no chance of success without its involvement. Tehran is providing the Shiite militias and the Iraqi army with arms, training, advisors, and pilots so that in many ways it is more deeply involved in the fighting than the US.

The most interesting news of last week was the rumor that Russia is about to sign a deal with Iran that could play a significant role in enabling Tehran to bypass the nuclear sanctions. Anxious to retaliate for the sanctions imposed on Russia over its actions in Ukraine, Moscow apparently has come up with a scheme in which it would barter Russian made goods for Iranian oil that would then be sold as part of Russia’s normal oil exports. Russia is also preparing to supply oil and gas equipment to Tehran and help it build more nuclear reactors.

Although the new pipeline that is to supply Iranian gas to the Iraqi electric power industry is complete, fighting in the region is delaying the actual shipment of gas.

Another round of the nuclear talks is due to begin on September 18^th with the usual hopes that disagreements can be narrowed.

3. Ukraine

The US and EU widened their sanctions on Russia last week and for the first time targeted Moscow’s arctic and shale oil projects which is bound to affect the contracts between Rosneft and Exxon Mobil. The EU, however, did not ban the completion of existing contracts as the US did so EU firms are free to work on Russian projects if the contracts are already in place Other new sanctions, however, will further limit Western financing of Russia’s state-controlled companies. Russia’s largest bank, Sberbank, was targeted for the first time. The new sanctions will prevent Western energy companies from providing technology and services to Russia’s five major energy companies. The Western firms will have two weeks to disentangle themselves from Russian contracts. Moscow is said to be preparing to ban US and EU airlines from its airspace, but some have noted that a counter-ban on Russian aircraft in EU airspace would be a real hardship on Moscow.

The EU made a significant concession to Moscow in that it has agreed to delay implementation of parts of the new political and trade pact with the Ukraine. Moscow’s strong opposition to this pact, which it sees as unacceptable Western encroachment on a former piece of Russia, is seen by many as the reason behind Moscow’s actions with respect to Ukraine. After years of suffering what it considers the loss of status brought about by the collapse of the Soviet Union, Moscow, with its self-respect revived by high oil prices, seemingly cannot tolerate the idea of Ukraine as part of the EU or even NATO.

It was the rejection of the EU trade pact under Russian pressure that brought about the former president’s downfall and the current situation. The recent action by the EU which shows some sensitivity to Moscow’s concerns could eventually lead to some sort of settlement. For now, a shaky ceasefire remains in effect, and some Russian troops have withdrawn from the Ukraine after having halted the government’s offensive against the dissidents. Over the long run the new sanctions could have a major impact on the pace of further Russian oil development, but it will be years before there are noticeable effects.

4. Quote of the Week

“From severance tax proposals of 5-10% to legislation to retroactively impose a $3 million/well ‘fee’ for every well that has been drilled on state forest land, it appears that some elected officials want to scrap the effective policies and regulations that have allowed Pennsylvania to become the second-largest natural gas producer in the US in 5 short years.”

— Louis D. D’Amico, president of Pennsylvania Independent Oil and Gas Association

“With natural gas production at an all-time high, a reasonable 5% severance tax would generate over $1 billion in 2015.”

— Tom Wolf, Pennsylvania’s Democratic gubernatorial Nominee

5. The Briefs

Nigerian October crude cargoes are selling very slowly due to tepid demand caused by an oversupply of light sweet crudes. (9/13)
Nigeria says eight billion dollars in revenue were lost in “industrial-scale” theft last year—the highest level in five years—and multinational oil giants have started reducing their on-shore presence here, selling off fields as a result of the theft. (9/10)
In South Sudan, China began deploying 700 soldiers to a United Nations peacekeeping force to help guard the country’s embattled oil fields and protect Chinese workers, installations, and the flow of oil. (9/10)
China imported 5.96 million b/d, preliminary data from the General Administration of Customs showedMonday. Imports were 17.5 percent higher than during the corresponding month last year, and up around 6.0 percent from July. (9/8)
Russia’s economic picture is worsening. Oil prices have dropped 12 percent during the current quarter, hurting earnings from oil exports, and the ruble has declined 12 percent this year. With no bond market auctions since mid-July, a steeper decline in Russia’s main export earner could flip the nation’s $19 billion budget surplus into a deficit by year-end. (9/10)
Russian oil production, a major source of government revenue, may decline slightly next year, after having risen steadily since 2009, the Energy Ministry said on Monday. Oil production has been broadly in decline this year, mostly due to the depletion of West Siberia’s oilfields and uncertainty over the government’s taxation policy. (9/9)
Britain has for the first time waded into BP’s legal battle over payouts for the Gulf of Mexico oil spill, saying US court rulings against the energy group raise “grave international comity concerns.” (9/8)
UK shale pioneer Celtique Energie said Thursday it was disappointed, but not surprised, by the rejection of its bid to explore for oil and gas in the South Downs National Park in Southern England. (9/12)
Canada’s crude oil exports have averaged about 2.78 million b/d this year. Exports to the USA are up about 27 percent compared with the same time last year. For the week ending Sept. 5, the U.S. EIA said Canada was the No. 1 oil exporter to the United States. (9/13)
In Canada the statistics of 2013 speak for themselves — record grain output in the Canadian Prairies of 76 million tons and record crude-by-rail loadings from neighboring Alberta and Saskatchewan of 250,000 b/d. With Canadian oil sands production continuing to rise, there’s a growing concern over the possibility of a standoff between the grain and oil industries for rail space and locomotives. (9/9)
The US drilling rig count increased 6 units to reach 1,931 rigs working during the week ended Sept. 12, Baker Hughes reported. The average US rig count for August totaled 1,904, up 28 from July and 123 from August 2013. An 8-unit gain in oil rigs to 1,592 was the highest since BHI began separating oil and gas rigs in 1987. Gas rigs declined by 2 to 338. (9/13)
California, the nation’s largest gasoline market, has cut its oil-by-rail volumes from Canada by 86 percent this year while buying more crude extracted and railed in from North Dakota, Colorado, New Mexico and Utah. (9/9)
US oil exports: Orders have surged for oilfield equipment used to make a light variety of crude safe for pipelines, after a federal ruling signaled that the specialized units also offered a workaround for companies eager to export oil from the US shale boom. The units, known as stabilizers, process condensates that come to the surface with crude, just enough to qualify it for export as a refined product, allowing oil producers to ship it abroad without violating a decades-old ban. (9/10)
Statoil ASA says a pilot project that captures flare gas in North Dakota is expanding to power six drilling rigs and a hydraulic fracturing fleet. Statoil said expansion is expected to provide environmental, cost-saving, and logistics solutions for the company’s Bakken operations. The company anticipates commercial expansion will increase its flare gas capture to 3-5 million cf/d by year end. (9/13)
Continental Resources said net production from the Bakken field, spread out over much of North Dakota and Montana, totaled 108,573 barrels of oil equivalent per day during the second quarter, a 23 percent increase year-on-year. (9/13)
GOM: Production is now underway from the Cardamom development, the second major deep-water facility Shell has brought online in the US Gulf of Mexico this year, following the start-up of Mars B in February. Oil from the Cardamom subsea development should peak at 50,000 barrels of oil equivalent a day and is piped through Shell’s Auger platform. (9/9)
The Minnesota Public Utilities Commission called on pipeline builder Enbridge Energy to examine new routes for its planned Sandpiper oil project. (9/13)
EIA’s short-term forecasts of gasoline consumption, which cover the current and upcoming calendar year, have risen over the past year. The latest Short-Term Energy Outlook (STEO) expects 2014 gasoline consumption to be 8.82 million b/d, 0.13 million b/d higher than last November’s forecast. The STEO gasoline consumption estimates include the volumes of ethanol contained in all gasoline-ethanol mixtures, including both E10 and higher blends. (9/11)
In the Ukraine, Russia’s energy giant Gazprom had provided a little more than half of Ukraine’s total gas supply, but suspended its shipments in June in the face of fighting in eastern Ukraine between Russian separatists and the Ukrainian military, citing a price dispute. Europe — itself dependent on Russia but also expanding sanctions on the country — has not been able to fill the gap. That means Ukraine will have to cut its energy use sharply or risk running dry, which could lead to more civilian deaths when the weather turns cold, and could further batter the country’s economy. (9/12)
Natural gas, not oil, accounts for two-thirds of the petroleum reserves discovered over the last decade, according to data from consulting firm IHS. And many of the largest finds are nowhere near homes and businesses that can burn the fuel. The Mozambique project, which has run up about $1 billion in costs for Anadarko thus far, is among the most extreme efforts to convert such huge discoveries into marketable energy. (9/9)
Natural gas production from Ohio’s Utica Shale rose fivefold in the past year. The Utica was producing close to 1 billion cf/d at the end of the second quarter, up from 165,550 mcf/d at the same point in 2013. The number of Utica wells drilled at the end of the second quarter doubled year on year to 562, 90% of which were hooked up to sales, with 58 wells awaiting pipelines or processing capacity. (9/10)
Coal generation down: The EIA lowered its estimates for coal-fired electricity generation by over 1 percent combined for the 2014-2015 period, while natural gas and renewables were revised higher. (9/10)
Fossil fuels investments: A nationwide showdown between activists and US universities over investments in coal, oil and gas intensified after a University of California task force abruptly pulled back a draft recommendation not to sell its fossil-fuel holdings. (9/10)
Divergent tax policies mean Norway risks missing out on most of a $6 billion wind-power boom while neighboring Sweden benefits. Norway, which aims to triple wind capacity by the end of the decade, has erected one turbine for every seven installed in Sweden since the countries signed a pact to share renewable production two years ago. (9/9)
A study by the US Geological Survey finds late-summer water temperatures near the Florida Keys are about 84 degrees F, about 2 degrees warmer than levels 100 years ago. When corals are exposed to water temperatures above 84 F they grow more slowly and, during extended exposure periods, can stop growing altogether or die. (9/11)
Greenhouse gases reached historic highs in 2013, a UN report says. Levels of heat-trapping carbon dioxide in the atmosphere rose at a record-shattering pace, a surge that surprised scientists and spurred fears of an accelerated warming of the planet in decades to come. Concentrations of nearly all the major greenhouse gases reached historic highs last year, reflecting ever-rising emissions from automobiles and smokestacks. Scientists believe the world’s oceans and plant life have a diminishing ability of to soak up the excess carbon put into the atmosphere by humans. (9/9)
The IEA said that energy efficiency is a hidden fuel that could support economic growth—one of several benefits that go beyond just cutting back on demand. (9/10)
Panama’s president says the major expansion of the Panama Canal will be completed in time to open for business in the beginning of 2016. The $5.25 billion project aims to reduce congestion and expand capacity. The new channel will be able to accommodate ships with twice the cargo capability of vessels that traverse the existing canal. (9/10)
Japan’s atomic regulator today approved a safety report for two reactors owned by Kyushu Electric Power Co., another step toward restarting two of its 48 functional nuclear plants shut after the Fukushima nuclear disaster more than three years ago. The two units are unlikely to restart before the first quarter of 2015. (9/10)
In Japan one of the biggest hurdles to building new power plants is finding a place that’s safe from earthquakes and tsunamis. That place may turn out to be 30 miles at sea. A Norwegian builder of offshore oil-drilling vessels is proposing a $1.5 billion natural gas-fired power plant that will float on a cylindrical platform bigger than a football field moored off the Japanese coast. Already, plans are being made to dot the coast off Fukushima with some of the largest floating wind turbines in the world. (9/9)