Peak Oil Review - Sept 29

1. Oil and the Global Economy

New York oil futures climbed some $2.50 a gallon last week to close Friday at $93.50. Meanwhile Brent futures sustained a 1.4 percent loss for the week, closing out at $97 a barrel thereby reducing the WTI/Brent spread to $3.45. US futures were helped by an unexpected drop in crude stocks; higher than normal refinery utilization rates; an unexpected jump in the US GDP during the 2^nd quarter; and concerns about a gasoline supply shortage along the east coast. In general oil traders believe the demand for oil products in the US is growing, while demand elsewhere is shrinking.

The continued growth in US tight oil production is raising hopes for better times ahead. The EIA expects US crude production to grow to the highest level in 45 years during 2015 when it will reach an average of 9.5 million b/d. US oil imports are to shrink to only 21 percent of US consumption. Wood Mackenzie, a perpetually optimistic firm of energy analysts, says that new techniques of producing tight oil will be in use by 2020 that could increase recovery rates by 100 percent and send production US oil production up by 1.5 to 3 million b/d.

The recent price decline has many crude exporters, who have become dependent on high oil prices, calling for lower OPEC production in order to drive prices higher. Iran, which is now saying that world prices could fall to $90 a barrel by next March, has been calling for lower OPEC quotas, especially for the Gulf Arab states whose production is not constrained by other factors. Although OPEC’s Secretary General suggests that the cartel could lower the 30 million b/d quota at its November 27^th meeting, such a cut has not yet been agreed on, and OPEC’s most recent report suggests that demand for its oil will slip to 29.2 million b/d next year anyway.

For the past two months, US natural gas futures have been cycling between $3.85 and $4.10 per million, reflecting uncertainty among traders as to what the coming winter will bring. Last winter’s unusually cold weather brought US natural gas reserves down to record lows raising the issue as to whether they could be replenished in time for the winter of 2014-2015. Mild summer temperatures and increases in natural gas production have gone a long way towards replenishing the stocks; however, they still remain about 13 percent below normal for this time of year.

With the heating season only a few weeks away, uncertainty exists about what will happen next. Forecasters are already talking about another unusually cold winter which, coupled with low reserves, could cause prices to explode. Natural gas prices, which are among the most volatile of the traded commodities, having reached a high of $15.65 per million BTUs in October 2008 – some four times the current trading price. Although production of natural gas from the Marcellus Shale has been increasing steadily in recent years, new sources of demand from power companies looking for cleaner energy and newly minted LNG exporters looking to profit from much higher prices in foreign markets are likely to add to demand. For the immediate future, however, the key price determinant is likely to be temperatures in the US during the next six months.

2. The Middle East & North Africa

Saudi Arabia: The kingdom has was back in the news last week for its participation in the coalition against the Islamic State, and for the prodigious amounts of crude it burned last summer in an effort to keep its people cool. Last week the EIA announced that the Saudis had burned 900,000 barrels of crude per day in their power plants during July. This compares with an average of 700,000 b/d of crude directly burned for power production in recent years and reflects the increasing summer temperatures in the region, and a growing GDP, as well as increasing population. Use of crude to produce power usually peaks in August and drops to around 300,000 b/d during the winter months.

After reducing their oil production by some 400,000 b/d in August, the Saudis are now saying they will continue to produce 9.6 million b/d for the rest of the year.

Iraq/Syria: Last week saw a major increase in the number of countries that have pledged to help in the coalition forming to dismantle the Islamic State. Washington says some 50 countries have agreed to offer some sort of assistance including the UK and France who will join the US and several Gulf Arab states in air strikes against the IS. The Turks are considering increased participation. It is hard to remember any occasion when so many world powers, large and small, have lined up against a terrorist organization. The melding of the Syrian and Iraqi uprisings together with the centuries old Sunni-Shiite conflicts, the Arab-Israel confrontation, Arab Spring, and the US/EU vs. Russia will undoubtedly extend turmoil in the region for decades to come.

Last week the coalition set out to neutralize a string of small oil refineries that have been supplying fuel for the IS’s military vehicles and generating revenue for the organization. While production from the eastern Syrian oil fields that have been captured by the Islamic State is well below pre-uprising levels they have become an important asset for the movement’s war machines. With dwindling sources of fuel, it will become difficult for the IS to launch conventional military offensives with vehicles and heavy weapons across miles of empty desert.

There are still no signs of progress in forming a workable Sunni/Shiite/Kurd coalition government in Baghdad which Washington says is a precursor to increased support.

Iran: Tehran is doing its best to link the fight against the IS to the nuclear talks over its alleged efforts to build nuclear weapons. Iranian President Rouhani has been signaling that the IS can only be defeated with Iranian help and that such help will be forthcoming if the West makes concessions in the nuclear talks. Iran, of course, is already deeply involved in efforts to keep the IS from overrunning the Shiite-dominated government in Baghdad and moving against sacred Shiite shrines south of the capitol. The whole Middle Eastern situation is becoming appropriately Byzantine.

3. China

The status and future of China’s economy has been a matter of concern for some months. Industrial production in August was the lowest since the 2008-2009 recession. In September, manufacturing unexpectedly picked up, a bit, but factory employment slipped to a 5-1/2 year low. So far there have been no major changes to economic policies. Despite the slowdown, China’s apparent demand for oil averaged 9.7 million b/d, a 3.7 percent increase over August 2013. The question of just how much oil is going into strategic reserve remains the great unknown in assessing China’s oil demand. The IEA recently reduced China’s growth in oil demand for 2014 to 900,000 b/d and 2015 growth in demand to 1.2 million. The Agency attributed this decline to a “pronounced slowdown” in the Chinese economy.

Last week, Beijing pledged to increase its cooperation with the UN on measures to deal with climate change. For the last 60 years China has sought to grow its economy with little reference to the pollution its economic growth has been causing. The next few years will tell if Beijing is really interested in dealing with climate change and air/water pollution at the expense of economic growth.

4. Ukraine
With the fighting winding down, last week attention shifted to how much gas, if any, Moscow will supply to Ukraine next winter. Last Friday, after talks between Moscow and Kyiv sponsored by the EU’s energy commissioner, the outline of a deal to restore natural gas flows to Ukraine was released. Ukraine will pay Gazprom some $3.1 billion of the $5.3 billion Gazprom says it is owed and Gazprom will resume gas flows after it receives the first $2 billion. Much of the dispute is the different prices that Moscow charges for its gas, with its “friends” getting better prices than other customers. Initially Ukraine will pay $385 per 1,000 cubic meters for its gas which is supposed to be a $100 discount from current prices.

The deal shows that Moscow is shifting to an economic strategy rather than military force to maintain leverage over Ukraine. Should the gas remain off during a harsh winter due to the Kremlin’s intransigence, Russia’s image would be mud as Ukrainians freeze to death and the EU struggles to share gas with Ukraine.

The Russian government will offer billions of dollars in aid to companies that are being hurt by their inability to get loans and capital infusions from the West. Russia’s economy is now growing at the slowest pace since 2009. Falling oil prices are compounding the problem. The recent arrest of a Russian billionaire is raising concerns about a government crackdown on private business which could in turn lead to still more capital outflows from the country. Western anger over the annexation of Crimea may lead to extensions of the sanctions which could do considerable harm to the expansion of Russia’s oil industry which is becoming increasingly dependent on foreign technology as it moves into the Arctic.

5. Quotes of the Week

“Despite the massive expansion of renewable energies [in Germany], achieving key targets for the energy transition and climate protection by 2020 is no longer realistic. The government needs to improve the Energiewende so that the current disappointment doesn’t lead to permanent failure.”

—Thomas Vahlenkamp, a director at McKinsey & Co. in Dusseldorf, Germany, and an adviser to the industry for 21 years.

“We can’t exit coal and nuclear plants at the same time. We need to consider the security of power supply…Yes, we are burning more coal [45% of power]; on the other hand it is also true that Germany still plays a leading role when it comes to emission reductions in Europe.”–Beate Braams, a spokeswoman for the German Economics and Energy Ministry

“The average day-ahead German power price will probably drop to the lowest in 12 years this year amid the boost of renewable energy and a glut of capacity at conventional plants.”
–Johannes Mayer, researcher at Fraunhofer-Institut fuer Solare Energiesysteme ISE

6. The Briefs

Saudi Arabia’s newest oil refinery reached full capacity—400,000 b/d—last month, adding to international competition that Total SA and Vitol SA said will force more European plants to close. Europe’s refineries are too small and not sophisticated enough to compete with new plants. (9/24)
The oil-refining wave in the Middle East is filling tankers to export the region’s processed fuels and driving freight rates to the highest for the time of year since 2008. Traders booked 19 percent more Persian Gulf oil products on tankers in the spot market this year than the same period in 2013.
In South Sudan fighting has erupted around Renk, a key border town in Upper Nile state. South Sudan says opposition forces supported by the Sudanese government are making a push towards oil fields further south. Renk sits near several oil fields in Upper Nile state, the largest of which is Palouge. The state is responsible for around 80 percent of South Sudan’s oil production. (9/22)
Arctic oil: Gazprom Neft confirmed a tanker filled with 200,000 barrels of oil extracted from an arctic field was shipped to markets in northwest Europe last week across arctic waters. It was the second tanker of oil delivered from the Yamal Peninsula. Changes in global weather patterns are leaving parts of the arctic region ice-free for longer periods of time. (9/23)
Norwegian energy firm Statoil said it will postpone development of its 40,000 b/d Corner oil sands project in Alberta, Canada, for at least three years. Statoil said it decided to delay construction of the project because inflation was pushing up the cost of labor and materials, while tightness in pipeline space to the U.S. market was pushing down the price of its oil. (9/27)
Total plans to divest $10 billion in assets during 2015-17 in an effort to improve cash flow and enforce stricter financial discipline. The announcement follows the realization of the company’s goal to divest $15-20 billion in assets during 2012-14. (9/24)
US drilling rigs targeting natural gas jumped by 9 this week to 338 according to Baker Hughes. The gas rig count has added 24 rigs since June after sliding for three straight quarters. The oil rig count fell by nine to 1,592. The rebound in gas rigs threatens to come at the expense of oil drilling. US crude has dropped by more than $10 a barrel over the past three months. (9/27)
ONEOK said it would invest between $480 million and $680 million between now and late 2016 to expand gas processing capabilities and associated infrastructure in the Bakken and Niobrara shale formations. ONEOK said it has built 11 new natural gas processing plants since 2010, including eight in the Bakken region of North Dakota. (9/24)
Increasing production of crude oil in the Permian Basin has outpaced pipeline infrastructure to move the crude to refineries, causing prices for crude in the Permian Basin (at Midland, Texas) to fall below similar crudes priced at Cushing, Oklahoma. August Permian Basin oil production will be almost 1.7 million barrels per day, 0.3 million bbl/d more than a year ago. A series of recent outages at refineries located in or near the Permian, and along the U.S. Gulf Coast, caused the West Texas Intermediate price at Midland to fall $17.50 per barrel below the price at Cushing, a record difference. (9/24)
Oil by rail: The American Petroleum Institute released new standards for testing and classifying crude shipped by rail after prior shipments were misclassified, including a train that derailed in Canada and killed 47 people. The API said the standards were crafted in cooperation with regulators and the rail industry. (9/26)
Environmental advocacy groups said they want President Barack Obama to ban the type of rail cars tied to recent oil train derailments. Older rail cars designated DOT-111 carrying crude oil have been involved in a series of disastrous derailments. In mid-September, Earthjustice, ForestEthics and the Sierra Club filed a lawsuit against the Department of Transportation for not responding to a petition filed in July calling for a ban on shipping Bakken crude from North Dakota using DOT-111 cars. (9/24)
Range Resources has agreed to pay a $4.15 million fine, close five impoundments, and upgrade two others at its Washington County operations. The fine is the biggest against an oil and gas producer in Pennsylvania’ s shale drilling era, the agency said on Sept. 18. Violations included releases of contaminants, such as leaking flowback that affected soil and groundwater. (9/24)
US gasoline prices typically decline in autumn, and this year they are being pulled even lower by falling global oil prices. By the end of the year, up to 30 states could have an average gasoline price of less than $3 a gallon. (9/26)
Gasoline: The average US household spent more than $2,600 on gas last year for a third consecutive year — an all-time high and a 111% increase compared with the amount spent a decade earlier. (9/27)
California’s Gov. Brown has signed into law several bills designed to boost use of clean-air vehicles and bicycles. One bill allows 15,000 additional electric and partial zero-emissions vehicles, or 70,000 total vehicles, to get green stickers that allow driving in carpool lanes even when solo. (9/22)
Nuclear: Three years after Japan closed all of its nuclear plants in the wake of the Fukushima meltdown and Germany decided to shut its industry, developing countries are leading the biggest nuclear construction boom in more than two decades. Almost two-thirds of the 70 reactors currently under construction worldwide, the most since 1989, are located in China, India, and the rest of the Asia-Pacific region. (7/26)
Home heating energy: On a national basis, natural gas has long been the dominant choice for a heating fuel in the residential sector. Lately, electricity has been gaining market share while natural gas, distillate fuel oil, kerosene, and propane have declined. Part of the national change in heating fuel choice can be attributed to population migrations farther west and south. But even within Census regions, electricity has been gaining market share at the expense of natural gas. (9/26)
Coal-to-gas issue: A study published in the journal Environmental Research Letters found that switching from coal to natural gas would not significantly lower the greenhouse gas emissions that drive climate change. That’s chiefly because the shift would delay the deployment and cost-competitiveness of renewable electricity technologies for making electricity, concluded the three researchers. (9/26)
US emissions of greenhouse gases are rising again after several years of gradual decline, according to new government figures. Data released by the Energy Department show American factories and power plants putting more carbon dioxide into the atmosphere during the first six months of 2014 compared with the same period in each of the past two years. The figures confirm a reversal first seen in 2013. (9/27)
When Germany kicked off its journey toward a system harnessing energy from wind and sun back in 2000, the goal was to protect the environment and build out climate-friendly power generation. More than a decade later, Europe’s biggest economy is on course to miss its 2020 climate targets and greenhouse-gas emissions from power plants are virtually unchanged. Germany used coal to generate 45 percent of its power last year, the highest level since 2007, as Chancellor Angela Merkel is phasing out nuclear in the wake of the Fukushima atomic accident. The transition, dubbed the Energiewende, has so far added more than 100 billion euros ($134 billion) to the power bills of households, shop owners and small factories as renewable energy met a record 25 percent of demand last year. (9/22)
India: In a blow to hopes of reaching an international deal to fight global warming, India’s new environment minister said Wednesday that his country would not offer a plan to cut its greenhouse gas emissions ahead of a climate summit next year in Paris. He said India’s first priority was to alleviate poverty and improve the nation’s economy, which would necessarily involve an increase in emissions through new coal-powered electricity and transportation. (9/25)
Wave energy pioneer Pelamis said it is on the short list of companies slated for a role alongside Irish utility company ESB to install its first wave energy facility, the five megawatt WestWave facilities, by 2018. (9/27)