Peak oil review – Mar 31

1.  Oil and the Global Economy
 
Oil futures have climbed steadily for the past two weeks, with NY oil up about $3 a barrel to close at $101.67 on Friday and London oil climbing about $2 to close at 108.07. Unease over the effect the Ukrainian situation will have on Russian oil and gas exports provided much of the impetus for the move, but some modest improvements in the US economic situation and the continuing drain of crude from Cushing, Okla. to Gulf coast depots contributed to the increase in US oil prices. Closure of the Houston Ship Channel for three days last week due to an oil spill also contributed to the higher prices.
 
While the shrinkage of the great Cushing oil glut has closed the gap between New York and London oil prices, some are wondering if it makes much difference if the glut only moves from Oklahoma to Gulf Coast storage facilities which are at an all-time high. This new glut is increasing the pressures to permit exports of US crude. During hearings in Washington last week many legislators called for lifting the restrictions despite the likelihood that domestic oil product prices would increase. A few clever refiners have figured out ways to do some minimal and inexpensive processing of their crude so it can be exported as “refined” oil.
 
An ethanol shortage is developing just as refiners are switching to summer blends of gasoline. Congestion on the railroads stemming from a tough winter and increasing movement of oil by rail across the country is believed to the reason for the ethanol shortage and the highest prices since 2006.
 
The situation surrounding US shale oil production is rather murky at the minute. North Dakota reports that Bakken oil production in January was 871,000 b/d, down from the 911,000 b/d produced in November. Since then however, we have had two more months of severe weather so it is possible that there will be little or no growth in Bakken oil production for four months. During 2013, North Dakota managed to increase its production by 207,000 b/d in the 11 months between December 2012 and November 2013. Whether we will see this much of an increase in Bakken production before next winter sets in again is a good question.
 
At the end of January there were 660 wells that had been drilled in North Dakota, but were awaiting completion services. Two months later, that number is likely to be higher raising questions as to how fast these new wells can be fracked and brought into production.
 
In addition to the harsh winter that befell North Dakota, there are indications that all is not well at Texas’ Eagle Ford formation, which is the region of rapidly increasing shale oil production in the US.  Although not subject to the extreme cold and snows that hit the Dakotas this winter, recent data suggest that growth at Eagle Ford may not be as robust as many are saying. To begin with, there seems to be a growing discrepancy between the production numbers reported by the Texas Railroad Commission which manages oil in Texas and what the EIA is reporting from Washington. The EIA seems to be reporting considerably more production than Texas officials state. Another issue is that the amount of condensate coming out of Eagle Ford, which is the valuable liquid part of the gas/liquid mixture that comes from the wells, seems to be slipping as a percentage of the combined production and in total. Some analysts are starting to ask whether the field’s production has peaked.
 
The EIA is forecasting that US crude and liquid fuels production will increase by over 900,000 b/d in 2014. The first quarter is over and there is a lot to do in order to reach this projection before next winter.
 
The US natural gas situation is not doing so well at the minute either. The week before last, US natural gas stockpiles fell by 57 billion cubic feet vs. the normal 7 billion for the same week. Last week saw a lot of cold weather across the northern US so that there may be another week of inventory shrinkage before our natural gas stocks can begin growing again. The number of rigs drilling for natural gas in the US is down 22 percent from last year. This is likely due to market prices for natural gas in the US still remaining below costs of production despite the recent price jump; however there have been improvements in rig efficiency that could account for part of the decline.  Imports from Canada have fallen in recent years due to the gas glut in the US, but the Canadians may still have some slack to increase their exports to the US before next winter.
 
 
2.  The Middle East & North Africa
 
Iran:  The nuclear talks continued in Geneva over the weekend with no word of any progress. The presence of Secretary of State Kerry at the talks had raised hopes that progress was about to be made. Tehran’s demand that its right to enrich uranium be formally recognized by all concerned is said to be the main sticking point. The west is insisting that better inspection rights and lower levels of enrichment be part of the treaty. Israel and some members of the US Congress are insisting on a complete ban on Iranian enrichment.
 
The situation has been further complicated by Tehran’s appointment as its UN ambassador a member of the 1979 group that took US embassy personnel hostage. The Obama administration is taking its time on granting a visa to New York amid rumblings from Congress of further sanctions on Iran.  It is clear the negotiations are at a critical point.
 
The Iranian government’s plan to nearly double its heavily subsidized fuel prices will be a major test of its ability to govern. With inflation still above 30 percent there is little else the government can do but cut back on the massive subsidies that has gasoline and diesel well below world prices. The government has yet to set a date for the increases, amid concerns that there will be a repeat of the rioting that took place after the last fuel-price increase.
 
Iraq: The duality of the country was highlighted last week as a new oilfield came into production pushing oil output to a 35-year high and the country’s oil revenues with it. In the meantime, shootings and suicide bombings continue apace with the death toll for March now above 500. With the Russian/Iranian – backed government in Damascus making progress against the Sunni insurgents, the UN is warning that ties between Sunni insurgents in Syria and Iraq are increasing. Some believe that the Shiite-led government in Iraq may be a softer target than the one in Syria.
 
Last week Iraq’s electoral commission resigned en masse charging that the government was interfering with its work. This puts April elections in doubt. The dispute seems to center on a clause in Iraqi election law which bans candidates of “ill-repute” from taking part. Some are saying the government is using this clause to ban its opponents from taking part and ensuring a third term for the al-Maliki government.
 
The opening of the giant West Qurna-2 oilfield outside of Baghdad last week marks a major step in Iraq’s hopes to become the major world oil exporter with a goal of producing 4 million b/d by the end of this year and 9 million by the end of the decade.  The new oilfield which is 75 percent owned by Russia’s Lukoil is starting with a production of 120,000 b/d but that will be increased to 1.2 million.  This surge in Iraqi production is starting to raise questions about Iraq’s position in OPEC and its exemption from the quota system.
 
Ten new Chinese-built trains have been delivered to Iraq to replace the decades-old ones that provide service between Baghdad and Basra.  The diesel-powered trains have been designed to operate in Iraq’s notorious sand storms.
 
Libya:  Despite the best efforts of the US, EU, and the UN, little progress is being made in turning Libya into a cohesive state. Following the ouster of the prime minister in the midst of the tanker crisis, the electricity minister, who just returned from 30-years of exile in Canada, seems to be in charge when he is not busy keeping the lights on. The trouble is that there have never been any established political institutions in the country other than Gadhafi himself. The parliament in trying to draft a constitution and hold elections, but progress is slow. The west is trying to raise and train a national army to counter the endless militia groups that made off with literally millions of weapons after the revolution.
 
Last week Libya’s oil production fell to 150,000 b/d which is about what the country needs to keep the lights on and bake the bread. With little or no oil revenue, the government must borrow what it needs to keep functioning. There is no end in sight for this situation. For the immediate future, the world will have to do without the million b/d that Libya was exporting while awaiting further developments.
 
Egypt: The makings of a civil war are forming in the northern Sinai as heavy-handed government forces attempt to suppress the extremists in the region. Reports are mounting of government atrocities against innocent civilians which is turning a largely Bedouin population against the government. The region exploded into violence after the ouster of former President Morsi eight months ago and has been going downhill ever since.  
 
Field Marshal Sisi has resigned and will likely be elected President at the May 26–27elections. Several possible candidates have declined to run for President saying that the support of the Army and security services would be required to win. The military government’s courts have sentenced to death 529 men for riots which led to the death of a policeman last August following the ouster of Morsi.  The government crackdown on the Muslim Brotherhood is said to be worse than in the 1990’s. Since August the Brotherhood has been outlawed, more than a thousand of its demonstrators have been killed and some 20,000 arrested. More importantly the Egyptian press has been cowed into silence by the arrest of newsmen.
 
While most of the trouble currently is taking place near Gaza some 150 miles to the east of the sensitive Suez Canal and pipeline, closing the canal is a prime way for the insurgents to seriously harm the government and its major source of revenue.  Although developments in Egypt seem to pose no immediate threat to oil shipments, the long run prospects for the 85 million Egyptians are not good.  The country is living on canal revenues and from the Gulf Arab states. More trouble can be expected this summer when power shortages are expected to cause still more trouble.
 
3.  Ukraine
 
Although so far the crisis has had minimal effect on oil and gas flows, many are worried that the buildup of Russian troops along the Ukrainian border signals Moscow’s intention to annex still more of the country.  Moscow strongly denies that it intends to annex more of the country, but is pushing for constitutional reforms that will give more independence to Russian-speaking Ukrainians in the eastern part of the Ukraine. Over the weekend the US Secretary of State met with Russia’s Foreign Minister to discuss these reforms. Moscow wants the Russian-speaking Ukrainians to have more independence from Kiev and to insure that the country does not end up in some western bloc such NATO or the EU.
 
Although the oil markets were jittery last week at the prospect of still more sanctions, developments over the weekend seem to indicate that a compromise is possible.
 
4.  Quote of the Week

• “The polar bear is us.”

— Patricia Romero Lankao, National Center for Atmospheric Research, referring to the first species to be listed as threatened by global warming due to melting sea ice.
 
 
5.  The Briefs
 

• Former oil geologist Jeremy Leggett identifies five global systemic risks directly connected to energy which together threaten capital markets and hence the global economy in a way that could trigger a global crash sometime between 2015 and 2020. According to Leggett’s new book, a wide range of experts and insiders from diverse sectors are expecting an oil crunch most likely within a window from 2015 to 2020. (3/29)
• In Angola, crude oil production today of 1.69 million barrels a day is set to peak at 1.9 million b/d in 2016 and then decline to 1.77 million in 2017. The timing of this turnaround by Africa’s second-largest oil producer could well be pushed back as new reserves are discovered. (3/26)
• Nigeria’s oil exports suffered a major setback as Shell declared force majeure on the export of Forcados grade crude oil after it had shut down the 400,000 b/d Forcados export terminal in Delta State. (3/27)
• In Venezuela, oilfield services provider Weatherford International said it is reducing operations in the country and expects its Russian business to grow this year. The Swiss-headquartered company said the “serious liquidity situation in Venezuela” is causing it to pare back services it provides inside Venezuela. (3/25)
• Venezuela’s government, seeking to confront the deep economic problems that have helped fuel weeks of protests here, took a step toward easing strict currency controls and opened what it says will be a free market for the sale of dollars to Venezuelans. (3/25)
• Mexico’s state oil monopoly Pemex is aiming to keep more than four-fifths of the country’s proven and probable oil and gas reserves for its own exploitation as the government prepares to open the state-run sector to private and foreign investment for the first time in 75 years. (3/25)
• Iran announced it has started up its first-ever floating gas condensate export terminal in the waters of the Persian Gulf. The terminal can export 600,000 barrels of gas condensate per day. (3/29)
• In September 2013, China’s net imports of petroleum and other liquids exceeded those of the US on a monthly basis, making it the world’s largest net importer of crude oil and other liquids, according to the EIA. Chinese production is estimated to be only a third of US production in 2014. On the demand side, China’s liquid fuels consumption is expected to reach more than 11 million b/d in 2014. In the meantime, US consumption in 2014 is forecast to be 18.9 million b/d, down 9% from the peak consumption in 2005. (3/27)
• China wants to break the dominance of China Petroleum & Chemical Corp. and its two biggest refiners by allowing smaller, independent oil refineries known as teapots to import crude as an alternative feedstock to fuel oil. The plants may be allowed to import as much as an additional 400,000 barrels a day under the new quotas. (3/28)
• As an alternative to the disputed Keystone XL pipeline, the Canadian billionaire Irving family has been advocating a proposal called Energy East.  A new 2,858-mile pipeline would link trillions of dollars worth of oil in land-locked fields in the western province of Alberta to an Atlantic port in the Irving’s eastern home province of New Brunswick, creating a gateway to new foreign markets for Canadian oil. (3/28)
• The US drilling rig count gained back the 6 units it lost last week to reach 1,809 rigs working during the week ended Mar. 28. Oil rigs increased 14 units to 1,487, the highest level since Baker Hughes split the oil and gas counts in 1987.  Rigs drilling for oil in the Eagle Ford of South Texas jumped by nine to 209, matching the previous high there. Gas rigs decreased 8 units to 318. (3/29)
• Tight-oil production averaged 3.22 million barrels a day in the fourth quarter, enough to lift total U.S. output to 7.84 million barrels a day, accounting for more than 10 percent of world production, the EIA said in a report March 26. Last month, almost two-thirds of the tight-oil output came from the Eagle Ford shale in Texas and the Bakken shale in North Dakota and Montana. (3/28 and 29)
• North Dakota’s average personal income increased 7.6 percent last year compared with the national average growth rate of 2.6 percent. North Dakota is the second-largest oil producing state in the country behind Texas. North Dakota produced 933,128 barrels of oil per day in January. (3/27)
• Marathon Oil will look to North American shale as a foundation for its 2014 growth agenda, Chief Executive Officer Lee Tillman said Monday. Tillman said his company plans to deploy more than two dozen rigs in the Eagle Ford shale play in Texas, the Bakken reserve area in North Dakota and the Woodford shale area in Oklahoma. (3/25)
• America’s Strategic Petroleum Reserve, an emergency stockpile of roughly 700 million barrels of oil, stands twice as large as the amount required by an international pact. George Soros has proposed selling some now to punish Russian President Vladimir Putin — and U.S. lawmakers are starting to listen. The USA could push down global oil prices by as much as $12 a barrel by selling 500,000 barrels a day from its strategic reserve. The lower prices would cost Russia about $40 billion in lost income from oil and gas sales, equivalent to 2 percent of its economy. (3/27)
• Worthington Energy Inc. said it will attempt to recover heavy oil in southeastern Kansas. The proposed project will be conducted in collaboration with American Dynamic Resources Inc. (3/27)
• US gasoline prices have risen steadily the past six weeks through March 18. Gasoline is now more expensive than at any point in the past six months. In a number of states, the price of gas is now more than $3.75 per gallon, vs. $3.52 nationwide. (3/24)
• Crude oil inventories at Cushing (OK), the primary crude oil storage location in the United States, decreased 13 million barrels (32%) over the past two months. On March 21, Cushing inventories were less than 29 million barrels, more than 20 million barrels lower than a year ago and the lowest level since early 2012. (3/28)
• Kinder Morgan Energy Partners will build and operate by late 2016 a 213-mile pipeline to transport carbon dioxide from its St. Johns source field in Apache County (AZ) to Torrance County (NM). The Lobos Pipeline will have an initial capacity of 300 MMcfd, supporting current and future enhanced oil recovery projects owned by KMEP and other operators in the Permian basin of West Texas and eastern New Mexico. (3/29)
• Britain’s Foreign Secretary Michael Fallon said it was time for European leaders to get serious about energy diversity in response to the crisis over Ukraine.   He said the British economy needs to rely more on domestic energy reserves like shale gas for national security’s sake. (3/25)
• European leaders would love to cut their energy imports from Russia, which supplies 30% of Europe’s gas and whose economy is heavily reliant on sales to Europe.  A new trade deal with the European Union could make it easier for U.S. firms to export liquefied natural gas to the continent. But many obstacles stand in the way of that goal, and it is unclear how, and if, the US can really help. (3/29)
• Australian energy company Woodside Petroleum said a February agreement to sign a deal to enter Israel’s Leviathan gas field was on hold. Woodside said in a statement the parties to an MOU haven’t settled the terms of a deal announced last month. The February arrangement would have granted Woodside a 25 percent stake in the field, one of the largest in the world. The company balked over Israeli tax policy, saying its profits from Leviathan should be tax free. (3/29)
• The Canadian government has approved four long-term liquefied-natural gas export licenses for projects along the country’s West Coast.  LNG from British Columbia can get to Asian markets in less than two weeks, compared with the month it takes a tanker to sail from export terminals in the Gulf of Mexico. The four export licenses combined will allow for the export of up to 73.4 million tons of LNG per year. (3/28)
• The development of China’s shale-gas industry has moved forward over the past year, but far more remains to be done than has been accomplished if the nation’s ambitious production targets are to be met, according to executives attending an energy conference here. (3/27)
• Expanding Asian economies will need to tap into as many sources of liquefied natural gas as they can to meet growing demand, a Chevron official said from Seoul. (3/26)
• As Europeans fret about the stability of their natural gas supply from Russia, gas buyers in Asia are looking to benefit from a situation that may improve import opportunities. The possibility that sanctions imposed by Western countries may eventually extend to Russia’s gas exports is prompting a cautious stance among buyers of Russian gas and investors in Russian projects. (3/26)
• US petrochemical companies are making multibillion-dollar bets to profit from the natural gas produced at low prices from shale-rock formations across the U.S. (3/24)
• The US Energy Department gave its consent to the Jordan Cove Energy project at Coos Bay, Oregon, to export domestically produced liquefied natural gas to countries that don’t have a free-trade agreement with the United States. There are more than 20 applications pending for non-FTA exports of LNG. (3/26)
• Japan is turning into a rare bright spot in the world coal market, stepping up coal-fired power generation to replace nuclear plants that went offline after the 2011 Fukushima accident. On Thursday, Kyushu Electric Power Co. said it would restart a long-frozen project to build a one-gigawatt coal-fired unit in southern Japan. Other utilities including Co. have announced similar plans for more coal-fired power. (3/28)
• Monday is the 25th anniversary of the disaster, in which the oil tanker Exxon Valdez ran aground on Bligh Reef and spilled at least 11 million gallons of oil into the pristine waters of the sound. The herring of Prince William Sound still have not recovered. Neither have killer whales, and legal issues remain unresolved a quarter of a century later. (3/25)
• Obvious oil spills, like the 168,000 gallons of oil that leaked into Galveston Bay on Saturday, usually make national news, accompanied by pictures of oil-blackened wildlife. But of the tens of millions of gallons of oil that enter North American oceans each year due to human activities, only 8 percent comes from tanker or oil pipeline spills, according to the 2003 book Oil in the Sea III by the U.S. National Research Council of the National Academy of Sciences. (3/26)
• The cost of borrowing for crisis hit countries in the Eurozone is tumbling amid expectations that the European Central Bank will be forced to start buying government bonds to fend off the specter of a damaging period of deflation. Fears that the Eurozone is drifting towards a Japanese-style bout of deflation were stoked further on Friday after prices fell in Spain this month and inflation edged down in Germany. (3/29)
• In China, only three of 74 large cities met official minimum standards for air quality last year, underscoring the country’s severe pollution problems. The dirtiest cities were in northern China, where coal-powered industries are concentrated, including electricity generation and steel manufacturing. (3/28)
• A drought in Brazil is crimping water and electricity supplies, creating tensions between the country’s two largest cities and raising the prospect of rationing that stands to hurt President Dilma Rousseff’s re-election hopes. The drought in Brazil’s wealthy southeastern region, home to São Paulo and Rio de Janeiro, is the worst in close to 50 years, and has severely depleted the reservoirs in a country that relies on hydroelectric plants for over two-thirds of its power. (3/27)