Peak Oil Review – Aug 18

1.  Oil and the Global Economy
 
The oil markets were volatile on Thursday and Friday last week – dropping to recent lows on Thursday and then partially recovering on Friday. At the close New York futures were little changed for the week at $97.35. London, however, closed out the week at $103.53, down 2 percent. A combination of fundamentals and geopolitical factors drove the markets last week. While last week’s developments in Iraq seem to point toward a lessened threat to the oil fields in Kurdistan and glimmerings of a political settlement between the Sunnis and the Shiites, tensions over the Ukrainian insurgency seem to be rising.
 
Oil prices have been falling since late June on hopes that Libya soon would resume significant exports; increased US crude production which is now at a 27-year high; and weaker global demand for oil – the IEA cut the projected growth in the demand for crude to 1 million b/d last week. Some of the selling also has been due to perceptions that the Eurozone’s economy has stalled and the China’s economic problems are worse than generally believed. Many traders believe that the outlook is still for lower oil prices, despite the tensions over Ukraine.
 
A new study shows that oil prices are not keeping up with the rapidly increasing costs of new oil sands and deepwater production. Some believe that it now requires $150 a barrel to earn a profit from new investment in the oil sands; and $115-$127 oil to earn a profit from deepwater production off Angola and Brazil. Given that the major oil companies are cutting back on capital investment, the future of major new deepwater and oil sands projects are becoming increasingly problematic until oil prices permanently go significantly higher – which of course cuts into consumer demand.
 
US retail gasoline prices continue to fall with the AAA reporting the retail national average down another 2 cents a gallon to $3.47, which is down 15 cents a gallon in the last month. The AAA says a recent survey shows that about half of American motorists believe that gasoline prices above $3.30 a gallon are too expensive.
 
Natural gas futures, which have fallen circa $1 per million BTUs since mid-June took another tumble on Friday to close at $3.77 after weather forecasts for the rest of August turned cool again. The mild temperatures in the eastern US this summer and a projected 5.3 percent increase in US natural gas production in 2014 have allowed the rebuilding of inventories for next winter’s heating season.  Unless next winter is extremely cold, traders believe there will be sufficient natural gas available even though inventories are still 19 percent below normal for this time of year.
 
2.  The Middle East & North Africa
 
Iraq:  It was a good week for the future of Iraqi oil production. With the resignation of Prime Minister al-Maliki and the appointment of a compromise candidate as prime minister, the prospects for a better political arrangement among the Shiites, Sunnis, and even the Kurds brightened. The US intervention into the fighting with minimal doses of airpower seems to have quickly changed the military situation in the northern part of the country. Over the weekend Kurdish forces, which given enough heavy military equipment and air support are fully equal to the IS forces, drove them away from the Mosel dam. The entry of Kurds from Turkey into the fighting has further enhanced the Kurds’ military position.
 
As more reports of massacres of ethnic tribesmen for refusing to convert to the IS’s brand of Islam continue to surface, world opinion is rapidly turning against the IS. The UN seems unanimous that their behavior is unacceptable and are moving to impose sanctions and call on all countries to counter the IS and its goals. Despite a reluctance to get involved, the US and at least France are now supplying arms to the Kurd’s Peshmerga which now seems able to not only halt the IS, but counterattack to retake important targets in northern Iraq.
 
The failure of the US to bomb IS forces around Baghdad has Iraqi politicians concerned that the US is playing favorites in its support for the Kurds. The IS continues to consolidate their positions around Baghdad and last week launched a series of attacks some 40 miles south of the capital.  It seems that a contingent of the Iranian Air Force, stationed south of Baghdad, is helping the Shiite forces defend the capital.
 
The oil situation is mixed at the minute. Although many foreign workers fled Erbil as IS forces moved on the city, the situation appears to have stabilized and as long as the US provides air support to the Peshmerga, oil production should continue or even increase. The Kurds say their largest oilfield will be producing 140,000 b/d by the end of the month. The IS has taken over several small oilfields in the north, but it seems likely they will be driven out by the Kurds in the near future.
 
The situation in the south is murkier. So far there has been no direct attack on oil production from the southern fields. While IS forces are slowly moving in that direction, there are a lot of Shiites in the way plus Iran which is already intervening to support Baghdad in a limited way. The best guess for now is that production will not be seriously harmed in the near future, but this situation could change if the IS decides to launch terrorist attacks on Baghdad’s oil facilities.
 
Libya: Considering the growing chaos, there certainly are a lot of optimistic news stories about the resumption of oil shipments. The oil fields are, however, remote from the turmoil in the cities and the export terminals are mostly small self-contained facilities. One tanker carrying 670,000 barrels of crude left the Ras Lanuf terminal last week, the first departure from that terminal in the last year. The government says production is up to some 300,000 b/d, but the Libyans are having trouble finding customers for their oil given the chances that it will be delayed or never shipped.
 
It the meantime, thousands of foreign workers continue to stream out of the country leaving the economy in shambles as fighting between militias continue. Over the weekend parts of Tripoli were shelled with heavy artillery. Heavy fighting resumed in Benghazi last week after a period of relative calm.
 
While sporadic shipments may take place from the oil ports that are officially open, it is unlikely that Libyan oil shipments will be sufficient to impact the international market. It seem far more likely that they stop completely as the country sinks further into an abyss and the remaining foreign workers who are the mainstay of the economy and even its healthcare system leave the country.
 
Iran:  The nuclear negotiations took a turn for the worse last week when the Supreme Leader, Ayatollah Khamenei, said Washington has become increasing hostile to Iran. Tehran’s Foreign Minister said that it is increasingly unlikely that a final nuclear agreement will be reached before November. Over the weekend, the head of the IAEA met in Tehran with President Rouhani about the lack on progress in responding to the IAEA’s concerns about Iran’s purported nuclear weapons program.  The meeting was described as “useful.”
 
Palace politics in Tehran are obviously in a state of turmoil with the radical Sunnis in Iraq and Syria rampaging around threatening Iranian interests across the region. Tehran has a lot invested in Syria and Iraq that could come undone in the next few years. Moreover, the Western sanctions continue to take a toll on the economy. In Tehran’s favor, the chance to make common cause with the West against the radical Sunni’s opens new opportunities for cooperation. It now seems that the threat that the IS will be able to spread its terrorism to the EU and even the US is now seen by many as more of a threat than a nuclear armed Iran. This could reduce the pressure for a nuclear agreement in the near term.
 
Tehran announced last week that the $500 billion oil deal with Moscow that would involve bartering Iranian crude for Russian goods was still on the table and had not yet been signed. The deal would allow Tehran to get its oil to world markets through Russia and thereby avoid the sanctions with Moscow’s help.
 
3.  China
 
The pollution problem continues apace. A major international meeting in Beijing forced local officials to ban more than half of the cars registered in the city from being used.  Last week, the NY Times editorial board took off after China’s massive consumption of coal which is the world’s biggest producer of atmospheric carbon. China has announced a ban on coal burning in Beijing and other major cities by 2020 and is considering a national cap on coal use by 2016.
 
Many fear that some of China’s plans may make the climate situation worse while cleaning up the air in major cities. One plan involves building 50 large plants to convert coal to gas which would be piped to the cities. This would result in still more carbon being released into the atmosphere while having the benefit of reducing the particulate matter released in the major cities.
 
Beijing’s efforts to produce large amounts of shale gas are running into troubles. The government recently announced that its 2020 target for shale gas production has been reduced to 30 billion cubic meters from the previous target of 60-80 billion. Last year China produced only 0.2 billion cubic meters of shale gas so it is difficult to see how it will reach the 2015 target of 6.5 billion. Although China is estimated to have the world’s largest shale gas reserves, the geology is difficult and costs of extraction are high.
 
The state of China’s economy is still a matter of debate, although the government says all is on track for a 7.5 percent GDP growth this year. New lending in July took a precipitous drop prompting some analysts to comment that things were much worse than they seemed and that there will be further repercussions. China’s oil imports for July were about 5.6 million b/d or 9 percent lower than in July of last year.
 
4. Ukraine
 
The confrontation between Moscow and Kyiv has the energy markets in a state of high alert. Ukrainian forces continue to make headway against the separatists and on Sunday said that its forces had entered Luhansk, one of the two remaining large cities that were taken over by the separatists. Moscow continues to send heavy weapons to the insurgents, but so far there has been no indication of direct participation by Russian army units in the fighting – except for possible artillery fire coming from inside Russian territory.
 
Most of the infamous Russian aid convoy of some 270 vehicles is still being held at the border amidst suspicions it is bringing arms and munitions to the insurgents in addition to humanitarian supplies. Although the border crossing is controlled by separatists, the Russians want guarantees the convoy will not be attacked by Ukrainian forces once inside Ukraine.
 
This situation seems to be getting to a critical point. As Ukraine’s army drives into the major separatist strongholds, Moscow must decide whether to intervene directly and set off years of trade sanctions or worse in a confrontation with the West. If there is direct Russian intervention, at some point this situation has got to affect current oil and gas shipments.
 
5.  Quote of the Week

•  “Comparing the [Kara Sea oil] project in terms of a resource base to other projects, we can say for sure that it is highly competitive with the largest resources, such as the resource base of Saudi Arabia, and will by far surpass the capacities of the Gulf of Mexico Shelf, Alaska and Canada.” 

                  — Rosneft Chief Executive Officer Igor Sechin
                              (Who also said the entire area in the offshore Arctic could
                                        hold as much as 87 billion barrels of oil.)

•  Norway’s National Petroleum Directorate said preliminary production figures for July show an average daily production of 1.93 million barrels of oil, natural gas liquids and condensate, about 8 percent more than was produced in June. Around 80 percent of that production volume was crude oil. The NPD said oil production was also 3.5 percent lower year-on-year. (8/15)
• South Sudan: Exxon Mobil ended exploration plans with Total, a sign of faltering investor confidence in the African nation as a civil war enters its eighth month. (8/15)
• In Mexico, Pemex, preparing for the end of its 76-year state oil monopoly, was granted rights to all the proved and probable oil reserves it sought for development as Mexico opens its doors to foreign competition. In March, Pemex asked to retain fields that hold Mexico’s 13.44 billion barrels of proven oil reserves and 83 percent of the 24.8 billion proved and probable reserves.  The first round of open bidding on untapped Mexico fields is scheduled to be held in the first quarter of 2015. (8/13)
• Brazilian energy company HRT said it was working with Russian energy company Rosneft on a plan for the monetization of a liquefied natural gas project in the Amazon Jungle’s Solimoes basin.  The Brazilian National Agency of Petroleum in 2012 said the region holds an estimated 2.4 billion barrels of oil equivalent in proven reserves. (8/16)
• Venezuela’s state-owned oil company has hired a French bank to help offload Citgo, its US downstream refiner and retailer. (8/13)
• US drilling rigs targeting oil and natural gas increased by five to 1,913 this week, according to Baker Hughes Inc. Oil rigs gained one to 1,589, gas rigs rose five to 321. The total has surged from 1,757 in January. (8/16)
• North Dakota officials are considering requiring oil and gas companies to stabilize crude before it is loaded onto trains. Stabilization—a process by which the vapor pressure of crude oil is lowered, making it less volatile—is common in similar shale plays like the Eagle Ford Shale. (8/16)
• Russian gas: A report Wednesday from Russia’s National Energy Security Fund finds gas production from EU member states declines 43 percent over the next 12 years when compared with 2013 levels. It says the EU currently is able to meet only 35 percent of its domestic demand for gas and has few export partners outside Russia. (8/13)
• Russian gas pipeline: Vladimir Putin’s dream of a new pipeline to deliver gas to the European Union without passing through Ukraine is fading amid escalating tit-for-tat economic sanctions. The $46 billion South Stream project, spearheaded by OAO Gazprom, is on hold and will probably remain in limbo for years as Russia continues to foment armed conflict in eastern Ukraine and the EU retaliates with bans. (8/15)
• India ranks among the top energy consumers in the world, with demand increasing at a double-digit rate. India’s dependence on imported fossil fuels rose to 38 percent in 2012, despite the country having significant domestic fossil fuel resources. Demand for natural gas is expected to more than double by the beginning of the next decade. (8/15)
• Poland: British energy company 3Leg Resources said efforts to bring Polish shale natural gas into production are going “very smoothly.” The company said it put a well in the Lublewo research area into a test phase to determine its potential to produce natural gas following a successful hydraulic fracturing program; they claim the well is a milestone for the exploration program in Poland. (8/16)
• Fracking the UK? Greenpeace said a British survey showing public support for hydraulic fracturing is biased because the industry itself was behind the assessment. Research group Populus conducted a survey for U.K. Onshore Oil and Gas that found more than half of the 4,000 people it surveyed expressed support for hydraulic fracturing in the country. (8/11)
• Pennsylvania went from producing 1 billion cubic meters of natural gas in 2008 to over 150 BCM in only six years. Just for perspective, 150 BCM is more than the entire annual use of the UK and Germany combined.  Pennsylvania’s track record with the results of water quality testing near fracked gas wells should be of interest to those in the UK. (8/11)
• Colorado fracking: Having avoided an election filled with competing initiatives that were guaranteed to displease about half of the electorate, regardless of the outcome, Colorado Governor John Hickenlooper recently created a task force to forge a path that accommodates activist concerns while ensuring that the state’s strong energy history continues. (8/15)
• In North Dakota, the Three Affiliated Tribes notified oil drillers late last week of a fee plan which would require companies that flare natural gas to pay royalties beginning a month after a well has been drilled. Oil production on the Fort Berthoud Reservation accounts for about a third of the state’s oil production. Building infrastructure to capture and ship natural gas that is co-produced with oil hasn’t kept pace with oil drilling.  (8/11)
• Shell said it plans to leave the Pinedale and Haynesville dry gas plays while adding acreage in the Marcellus and Utica shales in Pennsylvania, continuing its strategy of divesting large US natural gas assets in some plays, while adding assets in other plays to its portfolio. (8/15)
• Nuclear: EDF Energy, the British subsidiary of the French state-controlled utility, said on Monday that it was shutting down three nuclear reactors and that a reactor with a fault has been shut down since June would remain so. The facilities, which are being investigated as a precaution, generate nearly a quarter of nuclear capacity in Britain. (8/11)
• Wind: The U.S. government said it outlined three areas off the coast of North Carolina as potential sites for commercial wind energy development. The Bureau of Ocean Energy Management said more than 307,000 acres off the coast could be developed for wind energy. So far, the agency has awarded five commercial wind energy leases for the Atlantic coast, though none of the projects are in service. (8/13)
• Electric vehicles: The US DOE said it is investing more than $55 million on two dozen projects aimed at improving EVs. The initiative is part of a project launched in 2012 that aims to put plug-in electric vehicles on the same footing as fossil fuel-powered vehicles in terms of cost and convenience by 2022. (8/16)
• The electric car era may land in 2017 when at least two battery-powered cars that can attain 200 miles of driving range and cost less than $40,000 enter the market. In addition to Tesla Motors’ forthcoming Model 3, a leading battery maker says it is preparing a pack for an electric car that is more than double that of most vehicles on the road today, but at a similar price. (8/11)
• The US railroad industry has successfully shed labor costs by shifting to smaller and smaller operating crews. Now it’s on the verge of what was once an unthinkable: single-member crews, even on dangerous oil trains. A tentative agreement reached by BNSF Railway and the Transportation Division of the Sheet Metal, Air, Rail and Transportation union would allow a single engineer to operate most of the company’s routes. (8/11)
• Central America drought: An unusually hot season and extended dry spells have brought drought to areas in eastern and western Guatemala and El Salvador, southern Honduras and northern and central Nicaragua, destroying swathes of bean and maize crops, the region’s staple foods, and putting pressure on subsistence farmers and food prices. (8/16)
• Siberian craters: Two years ago NASA scientists warned that the fragile and rapidly changing Arctic region is home to large reservoirs of methane, a potent greenhouse gas. The three recently formed craters in Russia’s far north may be related.  Hot summers in 2012-13 may have helped thaw areas of permafrost, allow the ground to collapse and releasing the methane that had been trapped in the ground. (8/11)
• Antarctica glaciers melting because of global warming may push up sea levels faster than previously believed, potentially threatening megacities including New York and Shanghai, researchers in Germany said. Antarctica’s ice discharge may raise sea levels as much as 37 centimeters (14.6 inches) this century if the output of greenhouse gases continues to grow. (8/15)