Peak Oil Review – Mar 3

1.  Oil and the Global Economy
 
New York oil climbed $10 a barrel in the month between mid-January and mid-February. For the last two weeks it has traded between $102-103 a barrel with little change.  Much of the strength in New York prices has come from the opening of the Keystone pipeline from Cushing, Okla. to the Gulf which has resulted in 288,000 b/d being drained from the Cushing depot to Gulf Coast refineries in recent days. By the end of the year, the pipeline should be able to move 700,000 b/d, permanently eliminating an excessive buildup in crude at Cushing.
 
In contrast with NY oil, London’s Brent climbed about $5 a barrel between early February and the middle of the month, but since then has given up about $2 to close out February at $109.07. Last week’s moves left Brent at a premium to WTI of $6.48, the smallest difference since last October. A weak dollar and continuing cold weather in the US have contributed to the strength shown by oil prices. Many analysts, however, continue to say that oil in overpriced due to weak demand.
 
The cold weather in the US is now entering its fourth month with forecasts of more to come. This has not only increased the demand for heating oil, but has likely slowed the production of shale oil particularly from North Dakota which has endured one of the harshest winters in memory. The only solid numbers we have on shale oil production come from the North Dakota government (reports of oil production from Texas are usually late and subject to much revision) and the most recent are two months old, only running through December. These reports showed North Dakota’s December production down by about 50,000 b/d to 923,000 b/d. In December North Dakota reported completing only 119 new wells as opposed to the 130 or more required to keep production level and over 200 to continue to achieve the recent spectacular rates of growth.
 
There are 15 oil-train loading terminals in North Dakota with a capacity of 1.2 million b/d that in better weather have been shipping about 800,000 b/d.  Recent reports of railroad tank car loadings in North Dakota suggest that shipments from North Dakota may have dropped to as little as 345,000 b/d in late February due to multiple factors stemming from the extreme cold.
 
Private data on the Eagle Ford shale oil field in Texas suggest that production was flat at about 1.1 million b/d in January. In the last 30 months, US shale oil production has increased by about 2.5 million b/d which has sustained world oil production and has allowed it to grow as OPEC and other conventional oil fields have seen declining production. Thus, the key issue for global oil supply in the next few years is how long the US shale oil boom will continue.
 
In addition to the cold weather, new federal regulations on shipping volatile oil in antiquated railroad cars, particularly through urban areas, may have an impact on US shale oil production in the coming year. The new rules limit the amount of oil allowed in each car, thereby cutting shipments by about 40,000 b/d.
 
Recent EIA releases suggest that the government does not have any better data regarding US shale oil production and is only guessing when it reports flat or small decreases in US crude production in recent weeks. It will probably be May or June before we have a better appreciation of this winter’s impact on US shale oil production. In addition to the cold, droughts in the southwestern US and California are beginning to have an impact on the quantity of water available for fracking new wells. If shale oil production has fallen considerably during the four months of extreme cold this winter, it may be difficult to increase US shale oil production by the 1 million b/d in 2014 that the EIA is forecasting.
 
Natural gas prices fell last week, only rebounding on Friday when some forecasters suggested we may see another 2-4 weeks of unusually cold weather in March. After trading above $5.20 per million BTU’s last week prices fell to below $4.50 before closing at $4.60 on Friday. The higher prices being obtained domestically are raising questions about whether it is really advantageous to export considering the liquefaction and shipping costs.  Concerns about the adequacy of US natural gas stocks continue to be raised.
 
2.  The Middle East & North Africa
 
Iran:  Asian buyers increased their purchase of Iranian crude by 22 percent in January as opposed to a year before.  China’s imports of Iranian oil jumped 82 percent year over year to 567,000 b/d and were up by 11 percent from December 2013. South Korean imports, however, fell 66 percent to 64,000 b/d year over year. The increase in Iranian exports reflects Asian perceptions that progress in the Iranian negotiations is being made and that the sanctions will soon be lifted,  or at least Washington will stop threatening economic retaliation against importers of Iranian oil.
 
Over the weekend Iranian President Rouhani said that Tehran has decided not to develop nuclear weapons out of principle. Rouhani urged Iran’s military leaders to let diplomacy deal with foreign threats and bring the decades’ long dispute with the West to an end. In recent weeks, Iranian generals have been making intemperate remarks, firing off missiles, and beating war drums in an apparent effort to derail the negotiations the Rouhani government is undertaking.
 
Iraq: Baghdad’s dispute with the Kurds worsened last week when the Maliki government stopped giving the Kurds their share of the state budget and banned two airlines that fly directly from Iraqi Kurdistan to Europe from continuing to fly into Iraq. The Kurds continue to refuse to involve Baghdad in their oil exports to Turkey and clearly will not share any oil revenue.  Iraq’s Prime Minister is facing his first election without US troops in the country next month and feels the need to stand fast against the Kurds and Sunni insurgents in order to gain support from Shiite voters.
 
The bombings in Iraq continue with 700 killed in February and the situation in Anbar where an al-Qaeda affiliate has occupied parts of two major cities seems to be a standoff. The UN says it cannot keep track of the casualties in the Anbar fighting which clearly would raise the death toll much higher. The Angolan oil company Sonangol which has a stake to Iraq’s oil production says that after four years of working in lawless Ninewa province and consistently dealing with armed insurgent groups, it is pulling out of the country.
 
The good news, however, is that Baghdad says its oil exports in February were up to 2.8 million b/d from 2.2 million in January. The jump in exports is due to the completion of the project to expand Iraq’s oil export facilities. Iraq has a target of exporting 3.4 million b/d in 2015, including 400,000 b/d from Kurdistan. The country uses about 600,000 b/d domestically, implying that total production will soon be in the neighborhood of 4 million b/d.  About 2.5 million b/d was exported by sea through the Basra terminal while the remainder went through the northern pipeline to Turkey which is subject to frequent attacks. The export of 10,000 b/d by truck to Jordan was halted by the uprising in Anbar.
 
Libya: Oil production is bouncing up and down like a yo-yo with new announcements coming every few days.  About 230,000 b/d of production, some of which is coming from offshore or is out of the reach of the various militia groups seems to be fairly stable, but this is a million b /d less than the country was producing last year. It is also about 1.4 million b/d less than the country was producing in the Gadhafi era. About 150,000 b/d are required to meet Libya’s domestic needs for power and transportation, leaving about 80,000 b/d for export which is not enough to run the country.
 
Most of the oil in the eastern part of the country is being blockaded by the Benghazi separatists who say that nothing short of partition will free up the oil. There is a major 330,000 b/d oilfield, el-Sharara, in the western part of the country that keeps opening and closing at the whim of the local militias who are using the oil field as a bargaining chip in their negotiations with Tripoli over a long list of demands.  At last word the field was shut down again, but this could change momentarily. Shutting down oil fields is a complicated operation, so even when someone announces that the field is producing and sending oil to the coast, it is doubtful that it is doing so at anywhere near its rated capacity of 330,000 b/d.
 
Across the country the security situation is deteriorating with random assassinations of government officials and foreigners continuing.  In general, the situation continues to deteriorate and until a peaceful partition takes place or some new strongman arises, it is doubtful if we will be seeing much in the way of exports from Libya.
 
Elsewhere:   The Syrian situation is becoming more chaotic with the anti-Assad collation of insurgent groups breaking apart and the supplies it had been furnished falling into the hands of al-Qaeda affiliated groups. This will only prolong the war indefinitely.  The Assad government did manage to get a significant quantity of mustard gas down to Latikia where it will be shipped abroad for destruction. Israeli warplanes bombed a Hezbollah storage area in Syria. Such bombings have been occurring whenever the Israelis receive information that Hezbollah is moving advanced weapons into Lebanon for use against Israel.
 
Egypt has launched a diplomatic offensive against the new dam being built in Ethiopia that will partially block the Nile which Cairo depends upon for its food. If Addis remains obstinate that it will build the dam, then the Egyptians are threatening military action. This is one of several slow moving crises affecting the region. A lot of now-threatened Ukrainian wheat production has been going to feed Egypt’s 85 million people.
 
3.  Venezuela
Memories of Hugo Chavez are fading amid the protests that have been sweeping the country for the last three weeks resulting in 15 dead and 800 arrested including opposition leaders and newspaper reporters. The protests are directed toward rampant inflation, endemic crime, lack of food and basic necessities, and the gradual abolition of civil rights by the Maduro administration. The government seems to have no idea about what to do to ameliorate the situation aside from attempting to suppress news of the demonstrations and announcing a two-day holiday.
 
Thus far there has not been any noticeable impact on oil exports, but this situation has a long ways to go. In recent months, the US has been importing as much as 1 million b/d from the country.
 
4. Ukraine
Moscow is already threatening Ukraine’s natural gas and oil supplies. Ukraine imports about 70 percent of the 2.3 trillion cubic feet of natural gas it uses each year; however Russia’s share of Ukraine’s imports has been falling in recent years as the country attempted to diversified its sources of supply.  Total Imports have also dropped by nearly 40 percent in recent years older industrial plants were modernized.  The country also consumes about 300,000 b/d of liquid fuels with about 75 percent coming from Russia. Of more importance is the large amount of natural gas that transits the country on the way to some 12 Central and Western European countries from Russia. With the opening of the Nord Stream pipeline, however, the amount of natural gas transiting Ukraine dropped from 120 billion cubic meters in 2004 to 84 billion in 2012, but this is still a significant portion of Europe’s natural gas supply.
 
4.  Quote of the Week

• “Since 2005, U.S. oil production is up 3 million barrels per day. To put that in perspective, that’s more than the output of 9 of 12 OPEC nations.”

            — Daniel Yergin, Vice President of IHS/CERA
 
5.  The Briefs
 

• Lundin Petroleum, the Swedish explorer focused on Norway, said there won’t be any oil production in the ice-filled waters of the Arctic for at least 15 years because of technical and logistical challenges. Said Chairman Ian Lundin, “I don’t think we’ll see any oil production in the Arctic any time soon — probably not this decade and not the next. The commercial challenges are too big.” (2/24)
• New oil and gas contracts Iran is developing will offer higher fees for riskier exploration and production projects once international sanctions are lifted, oil ministry officials said at a conference in Tehran. (2/24)
• In southern Nigeria, Shell has shut a key oil pipeline to stop a leak caused by oil theft and sabotage, a spokesman said, without disclosing the volume of output loss. Local media in Nigeria estimated that about 95,000 b/d might have been shut in as a result of the closure. (2/28)
• London is arguing that it could better manage the oil and gas reserves offshore Scotland than an independent Scotland could. (2/25)
• The U.S. shale revolution has helped reshape the global energy market, but Middle Eastern oil will remain vital for meeting future Asian energy demand, said Fatih Birol, chief economist for the IEA. (2/26)
• British energy company BP is close to getting relief from a 2012 ban on new oil contracts secured through the US government, a company official said. The EPA barred BP from bidding on new contracts after the company pleaded guilty to environmental crimes in a major 2010 oil spill in the Gulf of Mexico. (2/25)
• Canada exported an average of 2.5 million b/d to the United States in 2013, up 10 percent from the previous year. (3/1) [Note: Canada also sends substantial crude oil and petroleum products to its eastern provinces—upwards of 1 million b/d.]
• TransCanada Corp. does not expect a Nebraska court’s decision to affect the US Department of State’s consideration of the proposed Keystone XL crude oil pipeline project’s cross-border permit application. (2/25)
• Keystone XL pipeline:  Republican governors said they had assurances from President Obama, during a closed-door meeting at the White House,  that a decision on the pipeline from Canada will be made by the summer. (2/25)
• Transocean‘s fourth-quarter profit fell 49 percent as the world’s largest offshore oil driller reported higher costs and a decline in fleet utilization. (2/27)
• ExxonMobil replaced 103% of its oil and natural gas production last year with additions to reserves, mostly of crude oil and other liquids. At year’s end 2013, the company’s reserves totaled 25.2 billion boe, 53% liquids. (2/24)
• The US drilling rig count declined 2 units to settle at 1,769 during the week ended Feb. 28, Baker Hughes reported.  Offshore rigs were at 55, land-based rigs at 1,696 and rigs drilling in inland waters at 18. Oil rigs increased by 5 to 1,430, gas rigs dropped 7 to 335. Canada’s total rig count was down by 6, at 626 units (oil rigs +1 unit to 423, with gas rigs -7 units to 203. Canada now has 29 fewer rigs compared with this week a year ago.
• The path toward US energy independence, made possible by a boom in shale oil, will be much harder than it seems.  Just a few of the roadblocks: Independent producers will spend $1.50 drilling this year for every dollar they get back. Shale output drops faster than production from conventional methods. It will take 2,500 new wells a year just to sustain output of 1 million barrels a day in North Dakota’s Bakken shale; Iraq could do the same with 60. (2/27)
• Devon Energy has completed its $6 billion purchase of 82,000 net acres in the Eagle Ford play from GeoSouthern Energy more than 3 months after the agreement was reported. (3/1)
• Tuscaloosa Marine shale formation: It’s estimated that oil companies have leased as much as 1.7 million acres of land in Louisiana and Mississippi above the formation, spending more than $300 million for those leases.  Some companies have been reluctant to drill because the shale’s makeup is different from other plays where horizontal drilling has been successful. Encana Corp. and Goodrich Petroleum plan to spend roughly $500 million between them in the area this year.  So far, Goodrich and others have drilled more than 30 wells across the region, trying to find the right methods.  Some early wells cost $12 million apiece, though drillers expect to bring that down into the $7 million range. (2/28)
• A flood of oil by rail is about to hit California, the third-biggest refining state in the US, from places such as Canada and North Dakota as suppliers seek to tap a market isolated from the rest of the country. The western US may bring 500,000 barrels of light oil by rail a day in 2015 as the region’s refiners seek to replace shrinking output in California and Alaska and more costly foreign imports. (2/26)
• A barge crash that spilled enough oil to temporarily shut a 65-mile stretch of the Mississippi River highlights the transportation risks of the U.S. energy boom just as regulators respond to several rail accidents involving crude. (2/25)
• It takes an expert pilot to pull off the Texas Chicken. The maneuver, in which crossing ships set up for a head-on collision and use each other’s wave pressure to swerve safely past, is the only way to handle two-way traffic in the Houston Ship Channel, which connects downtown with the Galveston Bay and Gulf of Mexico. (2/24)
• EIA petroleum data: for those who keep track, two monthly petroleum data sets for US oil production—one in the Monthly Energy Review, the other in the Petroleum Supply Monthly—should agree but they don’t. From December 2011 back they have the exact same production numbers but the near months differ greatly. (3/1)
• The Obama administration has unveiled an environmental analysis that could pave the way for seismic testing for oil and gas in the Atlantic. While President Obama had said in early 2010 that he planned to open up the Outer Continental Shelf off Virginia and several Atlantic states to leasing by the energy sector, he postponed consideration of those plans after the massive BP oil spill. (3/1)
• Turkish energy company Genel Energy said the semiautonomous Kurdish government in Iraq was exercising its right to purchase a 25 percent interest in the region’s Miran gas field. The Miran contract area covers 293 square miles and contains gross resources estimated at 3.5 trillion cubic feet of natural gas and 95 million barrels of oil. (2/25)
• In future gas exports markets, the United States is emerging as a major competitor to Australia, said Randa Fahmy Hudome, a former US Department of Energy official. He stated the US viewed Asia as its biggest market and was increasing LNG export approvals to fill future demand from that region. (2/28)
• The near doubling of US natural gas prices this winter has damped Asian hopes of buying American gas on the cheap when exports begin in a couple of years. Winter storms and bitter cold in recent weeks boosted demand in the U.S. (2/27)
• This season’s US natural gas withdrawal marks the fastest inventory depletion on record during the winter months. We have already withdrawn 2.4 tcf — more than the average for most winters — and we are likely 4-6 weeks away from the bottom. If withdrawals continued at the current pace, the inventory level would reach zero the week of March 28th. This may lead to more spiking prices in the weeks ahead, but more importantly it will probably support higher than normal natural gas prices for the rest of the year. (3/1)
• Pennsylvania Gov. Corbett has been touting his all-out support for natural gas drilling as a job creator in his state. But economists and environmentalists are questioning his claim, made during an election campaign, that the industry props up more than 200,000 Pennsylvania jobs. One in-state newspaper reported that growth in the industries associated with drilling in the Marcellus Shale fell by 29 percent from 2010 to 2013. (2/25)
• The EPA plans to unveil new regulations March 3 to reduce smog from automobiles, including cutting by two-thirds the level of sulfur in gasoline, people familiar with the agency’s deliberations said. One likely target would lower sulfur in gasoline to 10 parts per million from the current 30 parts. (3/1)
• After months of subpar economic data that has been blamed at least partially on the brutal winter weather, investors may still struggle to discern the real picture of the U.S. economy next week. (3/1)
• For six years in a row, India’s monopoly coal producer has missed its production targets, leading to chronic electricity shortages and sending power producers scrambling for pricier imports. However, from three years ago when solar capacity was almost zero, the country has added 2.2 gigawatts of solar to its electricity grid, enough to power 20 million Indian homes. It plans another 2 GW this year, toward a total 15 GW addition by 2017. (2/28)
• Air quality in New Delhi is among the worst in the world.  India subsidizes sales of the fuel to the equivalent of $15 billion a year, encouraging purchases of diesel vehicles that can pump out exhaust gases with 10 times the carcinogenic particles found in gasoline. The result: Delhi’s air on average last year was laced with double the toxic particles per cubic meter being reported in Beijing, leading to respiratory diseases, lung cancer and heart attacks.
• China and global companies are taking new steps to fulfill the country’s ambitions for electric cars, which so far have exceeded Beijing’s grasp. Chinese auto makers BYD Co. and BAIC Motor Co. on Wednesday won approval from Beijing’s municipal government to sell electric cars in the city. (2/27)
• Japan’s government on Tuesday released a 20-year energy policy document in which nuclear power is considered “a key base-load power source” along with coal, hydro and renewables. (2/25 and 2/27)
• The emerging field of “energy scavenging” is drawing on a wide array of untapped energy sources­ — including radio waves, vibrations created by moving objects, and waste heat from computers or car exhaust systems — to generate electricity and boost efficiency. (3/1)
• California’s drought: a storm that brought some of the highest rainfall totals to the Los Angeles area in years, including eight inches on some mountains, was just the beginning of what the region needs to pull out of a major drought. (3/1)