Quote of the Week
“Despite Europe’s desire to loosen its reliance on Russian gas, the shale revolution has turned out to be a dud. Difficult geological conditions, fierce environmental opposition, cumbersome regulations and a bloody war in Ukraine have conspired to quash investors’ enthusiasm and wear down their patience. The collapse of oil prices to less than $50 a barrel in March was the final straw because the cost of much of Europe’s gas, including Russian imports, is linked to crude.”
Bloomberg News 5-12-15
1. Oil and the Global Economy
Last week oil prices gained for the ninth week in a row, setting a 30-year record for consecutive weeks of price increases. On Wednesday New York oil futures approached $62 a barrel, but settled to close out the week at $59.69. London futures performed similarly, closing out the week 2.2 percent higher at $66.69. The debate over whether prices have climbed too high, too soon continues. Those believing that prices are going higher look at the continuing drop in the US rig count – down again last week to 660 which about 58 percent lower than where it was last October. Those people expect US production will be dropping shortly, and indeed the EIA now is forecasting an 86,000 b/d drop in US shale oil production next month. While this sounds like a lot, in comparison which total US production of around 11 million b/d this is not much. Market analysts are still expecting that US production which grew by 1.1 million b/d in 2014 will by up by another 675,000 b/d this year and 425,000 b/d in 2016.
However, a consensus seems to be building – right or wrong – that the steady growth in oil prices we have seen recently is coming to an end. The IEA reported this week that there is still a 2 million b/d global surplus; the major economies – US, China, and the EU – are showing little if any growth; and the 660 rigs still drilling in the US can produce a lot of oil as they stick to “sweet spots” where initial production is likely to be relatively high; and the Saudis are holding their production at about 10.3 million b/d in an effort to hang on to their market share. Then, of course we have another million b/d or so of Iranian crude waiting to come onto the market if an agreement can be reached and make it through the US Congress.
Major hedge fund managers, investment banks, and oil industry executives are starting to say that we should expect a drop in oil prices before the end of the year. Most of these prognosticators expect Brent crude to drop by $10 to $20 a barrel leaving it in the $50-60 range. However, some shale oil drillers are already talking about reactivating drilling rigs should oil climb another $5 or $10 a barrel.
Natural gas prices have jumped in the last two weeks going from less that $2.50 per million BTUs in late April to close above $3 on Friday. Some analysts are attributing this increase to hedge funds closing out short positions, but others see widespread switching to natural gas by electric power producers. US coal production has been dropping rapidly in recent months, and the EPA seems to be on its way to implementing tougher regulations on coal-fired plants.
2. The Middle East & North Africa
Iraq: Despite persistent US airstrikes, ISIL forces have seized most of Ramadi, the provincial capitol of Anbar province. Heavy casualties, caused by airstrikes and multiple suicide bombings, do not seem to hurt the morale of the ISIL forces who are willing to die for their cause. A similar situation is taking place north of Baghdad at the Beiji refinery where the government defenders are again cut-off from Baghdad and need to be resupplied by air. The refinery has not operated for more than a year, but it is a large installation with many thousands of barrels of oil in its storage, desperately needed by ISIL as allied bombing has destroyed much of the oil production in eastern Syria.
The revenue sharing agreement between the Kurds and central government seems to be breaking down as cash-strapped Baghdad is making smaller cash transfers to Erbil than the Kurds believe they are due. Low oil prices and ISIL insurgency has forced Baghdad to divert more resources to defense at the expense of other obligations.
The development budget for Rumaila, one of Iraq’s largest oil fields, has been cut by $1 billion for 2015, suggesting that the Iraq’s oil exports may not grow as quickly in the future. Although Iraq exported record amounts of oil in March and April, government officials are disappointed about the pace of export growth.
Iran: There was little news on the nuclear talks last week. On Friday, Tehran’s chief negotiator said he was optimistic, but that a deal could be reached only if Iran’s legitimate rights are respected and the sanctions are lifted immediately. The diplomat said his government is prepared for “all scenarios.”
The US Congress has passed a bill, which the White House says it will sign, giving the Congress the right to review any agreement with Iran before US sanctions are lifted. In the meantime, President Obama is busy trying to convince the Gulf Arabs that the nuclear agreement under consideration will not be as bad for them as it seems. The Arabs fear that the agreement will give the Iranian economy a major boost, which it will direct to fighting wars in Syria, Lebanon, and Yemen.
Iranian patrol boats fired warning shots at a Norwegian oil tanker that Tehran says caused $300 million worth of damage to an Iranian oil platform in collision last March and then fled the scene. In last week’s incident the tanker did not stop but radioed for help and fled into Dubai.
Saudi Arabia/ Yemen: The humanitarian truce in Yemen broke down over the weekend with heavy fighting resuming in several places. A conference on the future of Yemen began in Riyadh on Sunday; however, the Houthi rebels who control most of the country are not participating.
The humanitarian crisis is worsening. Without fuel and electricity the deep wells, which supply much of the country’s water supply, will not function. Water theft is becoming common, as are robberies at water tanks. The local paper is saying that soon there will be no water to be had at any price. Hospitals are closing due to a lack of power and emergency generator fuel. Reporters are saying that the lack of food and water will soon be causing more deaths than the fighting.
An Iranian aid ship is on its way to Yemen’s port of Hodeidah. The Iranians say there are medical personnel on board as well as journalists to report what happens should the “humanitarian” ship attempt to run the Saudi blockade without taking its cargo to the UN Yemen aid center in Djibouti.
Increasing tensions in the region has the new Saudi government saying that it too will acquire nuclear weapons unless a deal satisfactory to them is signed with Tehran. The Saudis have long been suspected of supplying the money which Pakistan used to develop and build its nuclear weapons. Although Pakistan was unwilling to send ground troops to fight for against the Shiite insurgents in Yemen, they may feel obligated to furnish either functioning nuclear weapons or technological know-how to the Saudis.
3. China
The economic news continues to be bad. In April China’s money supply grew at its slowest pace on record and investment was the lowest in 15 years despite numerous government efforts and decrees to speed up the economy. Some are saying that China is heading for its worst year in 25 years and that the likelihood of its GDP growing by the hoped for 7 percent this year is slipping away.
The good news, however, is that a combination of air quality policy initiatives and the slowing economy has China’s carbon emissions dropping rapidly. A new analysis published by Greenpeace says that Beijing’s emissions dropped by 8 percent in the first quarter — an amount equal to the total carbon emissions of the UK. Some of the cut came from government efforts to curtail the use of coal, which dropped by 6.1 percent in the first quarter. This drop in coal burning equates to nearly a 5 percent drop in carbon emissions. The rest of the decline came from a weaker economy and less industrial activity.
Two winters ago, China’s capitol suffered a siege of extremely bad air pollution, which lasted for more than a week and endangered the lives of many vulnerable people living there. Since that time the government has been taking air pollution and to a lesser extent carbon emissions seriously and is planning for major changes in the country’s energy balance to lower the use of coal. China is still responsible for 30 percent of global emissions, and in 2014 surpassed the EU in per capita emissions.
4. Russia/Ukraine
Russia’s GDP contracted by 1.9 percent in the first quarter, which was nothing compared to the 17 percent hit that Ukraine’s economy took. Aside from the contraction in its economy, Moscow had a good first quarter with oil prices rebounding into the high $60s and the ruble doing much better. However, if forecasts of lower oil prices are correct, the rest of the year may be more problematic.
Russian oil production has been holding steady at around 10.3 million b/d in large part due to the numerous new wells that it drills each year in its large, but aging oil fields. According to the EIA, Russia drilled some 8,600 new wells in 2014 to maintain its oil production as compared with 36,000 in the US and only 399 in Saudi Arabia all of which are producing 10-11 million barrels per day. Many observers, including those in Russian think tanks, are saying that Moscow’s oil production will peak this year, but then will only decline gradually over the next two decades. For now the possibility of significant oil coming from the Arctic does not look good due to Western sanctions on its projects.
Fighting in the Ukraine continues to sputter along, with the Western powers still hoping to salvage the three month old cease fire agreement which seems to be nearly finished. NATO says that Moscow is planning a new offensive against Ukrainian positions. The EU is telling Moscow that it will extend the sanctions if it does not start honoring the ceasefire. For now Moscow seems to be weathering the sanctions as its oil is rather low-cost coming from conventional fields. Although Russia is suffering from the lower ruble this does not bother Russian oil companies whose costs are largely in rubles. This is looking like a standoff that will last for quite some time.
5. The Briefs
The International oilrig count has fallen by 150 rigs, from 1,080 in July 2014 to 930 in April 2015. This count does not include the USA, Canada or any of the FSU countries. (5/11)
Europe’s estimated shale gas reserves aren’t negligible: they probably amount to about four fifths of those in the US. The problem is that most countries either have an outright ban on hydraulic fracturing or have imposed a moratorium until its effects on the environment become better known. (5/13)
The UK’s new energy secretary, Amber Rudd, drew praise from both the oil-and-gas industry and green lobby groups ahead of decisions on the nuclear industry and hydraulic fracturing that other nations will be watching. The appointment of Ms. Rudd, a former parliamentary undersecretary at the Department of Energy and Climate Change, was announced Monday. (5/12)
Solar U.K.? Incoming British Energy Secretary Amber Rudd told her local newspaper she aims to usher in a “solar revolution” through the new administration. (5/16)
In Serbia, the foreign minister told his Russian counterpart Friday joining a gas pipeline project through Turkey was in his country’s best interests. (5/16)
The Trans Nigeria Pipeline that carries Nigeria’s Bonny Light crude oil to an export terminal has been shut down since May 12, a Shell spokeswoman said on Thursday. (5/16)
In Nigeria, a former governor of the Central Bank has reacted to the recent audit report by PricewaterhouseCoopers on the alleged missing $20 billion oil money, saying the report has confirmed that at least $18.5 billion was indeed missing. (5/15)
In Nigeria, as the military battled Boko Haram over the past year, scores of soldiers made a decision that would put their lives in grave danger — they refused to fight. It wasn’t for lack of bravery, they said. It was for lack of weapons, often a function of corruption. (5/11)
In Colombia, exploration drilling in the oil patch in the first quarter fell 82.5 percent compared with the year-ago period, while seismic exploration sank by an even steeper 92 percent. Only nine exploratory wells were drilled in Q1, down from 52 drilled in the year-ago period. Seismic exploration totaled 800 square kilometers, down from 10,000. (5/13)
The US oil-rig count fell by eight to 660 in the latest week, according to Baker Hughes. There are now about 59 percent fewer oil rigs working since a peak of 1,609 in October. That hasn’t yet translated into a drop in actual oil production output, even though it has squelched production capacity. For the combined gas and oil rig count, a total of 6 units were laid down to settle at a total of 888 total rigs working, representing the smallest drop in the 23 consecutive weeks in which the count has dived. (5/16) (Note: the final verdict is not yet in on the oil production’s growth.)
Analysis from research center IHS finds advances in hydraulic fracturing used in the United States could unlock oil in mature fields outside North America. By applying the new technology to low-productivity oil basins, IHS found there may be hundreds of billions of barrels of potential new oil. (5/15)
Though Shell may drill in Alaska’s arctic waters no matter how many protests are held, a Seattle organizer said the company could be cast in a bad light. Seattle organizers are planning weekend protests against Shell’s use of a port terminal for drilling rigs bound for the Chukchi Sea off the coast of Alaska. (5/16)
Florida lawmakers introduced a bill to ban early oil and gas work—seismic testing—off the state coast, saying an early push for east coast drilling was too risky. (5/15)
New York has released its long-awaited report on high-volume hydraulic fracturing, which appears to cast doubt on whether the state will ever give a green light to the drilling completion practice, which essentially has been prohibited since 2008. (5/15)
Crude-by-rail: Environmental groups are the latest challengers to push back against the new crude-by-rail rules with filings in federal court that argue the new regulations are too weak. (5/15)
Noble Energy said Monday it was moving into two Texas shale basins with the $2.1 billion acquisition of rival Rosetta Resources. Noble moved to acquire all the common stocks of Rosetta Resources, which hold more than 100,000 net acres in two premier Texas shale basins—the Eagle Ford and the Permian. (5/13)
Macondo redux: Deep-water drilling is set to resume near the site of the catastrophic BP well blowout that killed 11 workers and caused the largest US offshore oil spill five years ago off the coast of Louisiana. LLOG’s permit to drill a new well near BP’s site was approved April 13 by the agency, which oversees offshore oil and gas drilling operations. (5/14)
BP has let a contract to expand pipeline systems for an expansion of ultra-deep water Thunder Horse oil and gas field. The project includes a new drill center 2 miles from the Thunder Horse semisubmersible production, drilling, and living-quarters platform in 6,050 ft of water. Four wells will tie in to the drill center. BP expects production from the project to start in 2017 and peak at 42,000 b/d. Production from the Thunder Horse platform, which has capacity to handle 250,000 b/d of oil, began in June 2008 but has averaged only 85,000 b/d of oil early this year. (5/14)
LNG exports: The Energy Department gave authorization to the Corpus Christi Liquefaction Project to export LNG sourced from domestic reserves to countries that don’t have free-trade deals. (5/14)
Ethanol issue: In a long-running battle between oil refiners and the US farm lobby over the future of ethanol fuel, biofuel producers may have just made a small dent in big oil’s formidable defenses. Over the past few months, privately held retailers Kum & Go and Sheetz have become the first significant chains to announce plans to start selling E15, a gasoline with15 percent ethanol, 50 percent more than the typical US E10 blend. (5/13)
Battery bust-out: Tesla’s new line of big, stackable batteries for homes and businesses started with a bang. The reservations reported in the first week are valued at roughly $800 million, according to numbers crunched by Bloomberg. If Tesla converts even a fraction of those reservations into actual sales, the battery rollout could measure up as one of the biggest ever for a new product category. (5/13)
Weekly US coal production dropped to the lowest full-week estimate in the last five years. The estimate is down 7.7 percent from the prior week’s estimate and down 15.1 percent from the year-ago week. The weekly total marked the 12th straight week of lower production when compared with last year as the coal market continues to deal with the fallout from low natural gas prices. (5/15)
India’s Prime Minister Modi wants to end decades of electricity shortages and turn his country into a manufacturing dynamo. Yet at several state-run behemoth mines, men still move coal in baskets on their shoulders. At another project, electricity is so unreliable miners descend in a steam-powered elevator. (5/14)
Food worries: Researchers report that as the world population increases and food demand grows, globalization of trade has made the food supply more sensitive to environmental and market fluctuations. This leads to greater chances of food crises, particularly in nations where land and water resources are scarce and therefore food security strongly relies on imports. (5/13)
In Asia, a strong El Nino will roil economies that are heavily dependent on agriculture, particularly India, which is already reeling from bad weather. It would also unhinge supply chains of commodities such as rice, corn and palm oil. (5/13)
In India, farming accounts for only 15 percent of the nation’s $2 trillion economy but provides a livelihood to 60 percent of its 1.25 billion people. From the start of the crop season last October through March, India’s farm exports have fallen more than 11 percent to $15 billion This emerging crisis in the countryside could have severe political impact. (5/15)
Drought: In the American West, tension caused by the historic drought is pitting some of the nation’s fastest-growing urban economies against some of its most troubled rural ones, where unemployment and poverty rates remain high. The struggle will be complicated by the West’s often-byzantine laws for allocating water. And it raises questions about whether the region and the country can afford to use so much water for agricultural purposes. (5/11)
Population bomb: Amidst all the liberal internationalist angst about greenhouse gases and pollution generally, the greatest and most obvious cause of both is ignored by mainstream politicians: the already great and rapidly rising population of the world. (5/11)
