Peak Oil Review - Dec 15

1. Oil and the Global Economy

Oil prices fell steadily last week closing at $57.81 in New York, and $61.85 in London. Traders say the decline was due largely to new downward revisions of official forecasts for oil demand in 2015. Some in OPEC are now saying the markets are oversold; however, most observers see no immediate end to the price slide, and expect still lower prices in the coming week and the first quarter of the new year. The IEA and EIA are saying that growth in production of non-OPEC crude, especially US shale oil, will continue for some time and that it will be months before supply and demand come into balance. Last week the IEA lowered its forecast for oil demand for the 5^th time in six months, sending the Dow Jones down by 315 points. Since June the Agency has cut its demand forecast for next year by 800,000 b/d. At the same time IEA says US oil production will rise by 1.3 million b/d next year, while the EIA in Washington says it will be up by 700,000 b/d next year, which is down from last month’s estimate of 900,000. The EIA, however, forecasts that lower rates of production growth will not come until the second half of 2015.

Some are saying there is already an excess of some 2 million b/d going into storage around the world. US stocks were up by 1.5 million barrels last week, but China in particular is taking advantage of low oil prices to store away millions of barrels in their newly built strategic reserve facilities. As there is a limit to how much oil these facilities can hold, the stream of tankers carrying oil to Chinese strategic stockpiles will likely slow soon adding to the supply/demand imbalance.

Unless there are major, and unexpected, production cuts in the immediate future, some are saying we could see oil prices down in the $30s as we did in 2008, simply because there is no place to store the excess production. With the Gulf Arabs and Russians, who are low-cost producers, insisting they will not cut production, the most likely place where there will be cuts in the short term will be among the high-cost producers in the US and Canada. As offshore and tar sands projects are mostly large and expensive, and cannot be easily slowed, most attention is focusing on US shale oil producers who must drill hundreds of new wells every month simply to keep production level.

In the US we are already seeing signs of a drilling slowdown despite IEA and EIA forecasts that there will be robust growth in US shale oil production for the first half of next year. Last week Baker Hughes reported that the number of rigs drilling for oil in the US dropped by 29 to 1,546. North Dakota reported that there was a small but unusual drop of 4,000 b/d in its oil production between September and October leaving it at 1.182 million barrels per day. The number of new well completions dropped from 193 in September to 134 in October, although some of this drop may have been due to weather and new regulations. Of more interest is the note that Bakken shale oil is now selling for close to $40 a barrel at the well head, a price which outside observers say is well below costs of production for many if not most new wells being drilled in North Dakota. While some North Dakota drillers still tout their ever-increasing efficiencies, mostly for the benefit of their Wall Street bankers, numerous smaller drillers in the Bakken have announced plans to cut back in the coming year.

The debate over whether lower oil and gasoline prices is a good or bad thing is picking up. Obviously if your income depends directly or indirectly on the oil business, you are already doing worse than you were six months ago. Much of the oil industry, at least six US states and many localities are already looking at next year’s budgets with an eye to making substantial cuts. On the oil consumer side, the US Secretary of the Treasury said last week that the drop in oil prices is the same as a massive tax cut as much of our wealth is no longer being shipped to the treasuries of foreign countries. In the short run some of us are doing better and some worse.

In the long run, however, it may be a different story. Since the 2008 recession, the energy industry has been the major creator of those new jobs that were created. Without the boom in shale oil and gas the employment situation in the US would be much worse. Ditto for capital expenditures, some one third of which in recent years came from spending to develop more energy. Now that the energy boom may be turning into an energy bust, the economic picture for the next few years might not be so rosy. The trouble is that the US is both a major producer and consumer of energy. Reuters says that the number of new drilling permits issued in November were down by 40 percent which may be a more realistic clue as to what the coming year will bring. The shale oil boom is estimated to have created some 1.3 million jobs many of which will be lost as drilling slows.

An even more important issue is whether a contraction of US shale oil production could trigger a major financial crisis. The energy industry is said to be holding some 18 percent of the high-yield “junk” bonds outstanding and some say that as much as 40 percent of energy junk bonds could default if oil prices remain low for an extended period. A default of this magnitude could be enough to trigger a financial market meltdown.

Over the weekend, agreements were reached at the UN climate change meeting in Peru that set the stage for a new agreement on climate change among 190 nations present. A key meeting is set for December 2015 in Paris to conclude a new treaty that will replace Kyoto. The significance of the Lima agreement is that it pledges all countries, not just the “rich” ones, to make efforts to reduce emissions. There is a long way to go to get a workable treaty, however, as the argument over climate change vs. economic growth with ever increasing emissions continues in many countries including the US.

2. The Middle East & North Africa

Iraq: There has been little news concerning Iraq’s oil industry in the wake of the Erbil/Baghdad agreement two weeks ago. ISIL continues to overrun isolated villages in the north of Iraq and the US bombing campaign continues. The British are planning to send combat troops in Iraq to defend a large training establishment it is setting up for Kurdish and Iraqi forces. Perhaps the most interesting news of the week was that China has offered to help Iraq defeat ISIL; however, Beijing will not go so far as to join the US-organized coalition against ISIL.

Libya: The situation is as muddled as ever. In October, Libya was supposed to be producing 860,000 b/d, but this was said to have fallen in November when the 210,000 b/d Sharara oil field was closed. On December 8^th a Libyan National Oil Company spokesman said the country’s production was 800,000 barrels of crude per day, but this includes 140,000 b/d consumed domestically.

Over the weekend, the National Oil Company announced that it had closed two of its largest oil export terminals that were said to be exporting 300,000 b/d. On Saturday a 300-vehicle column of Islamist militia forces driving to the east attempted to seize the terminals, but were driven back by Petroleum Protection Forces and air strikes by the Libyan Air Force both of which are still loyal to the Tobruk government. The company also said it is taking measures to halt production at some oil fields because of the attacks.

Iran: Tehran announced last week that the long-discussed oil barter deal with Russia that might enable Iran to get around western sanctions is not true, and that no such agreement has ever been signed. This announcement runs counter to what the Kremlin has been saying about the deal in recent days. The nuclear talks are scheduled to resume this week amid some optimism that lower oil prices may force Tehran to come to an agreement. An agreement with Russia to skirt the sanctions would obviously have hurt the prospects for the talks and possibly even brought them to an end, greatly increasing tensions in the region.

In the meantime, Iran is clearly hurting from the falling oil prices. President Rouhani has denounced the oil price drop as an international conspiracy against Iran. With only some 1 million b/d in exports, a 40+ percent drop in oil prices is leaving the Iranians with little foreign exchange earnings at the time when its involvement in Middle Eastern wars is increasing. Last week the Israelis bombed a facility in Syria that was believed to be holding Iranian missiles being shipped to Hezbollah in Lebanon.

3. China

It is now “official” that the Chinese economy has overtaken that of the US to become the world’s largest. New IMF numbers say China will produce $17.6 trillion this year with the US second at $17.4 trillion. As recently as 2000 the US economy was three times the size of China’s.

Beijing’s factory output declined in November, another indication of lower oil demand ahead. Industrial production was 7.2 percent over November 2013, but was down from October’s 7.7 percent increase and September’s 8 percent. Some western economists are saying more vehemently that China’s official growth numbers are inflated and that real growth is closer to 3 or 4 percent. Chinese refiners produced near record volumes of refined products in November increasing output by 5.5 percent year over year to 10.3 million b/d. The Chinese are taking advantage of low oil prices to import larger amounts of crude than they are actually consuming, some of which is being refined for storage or export while the rest is going into the strategic reserve.

China’s environmental problems continue to move up the priority ladder and may eventually slow the country’s breakneck economic growth. Last week China opened the first sections of an $80 billion project to divert water from the Yangtze directly to the water-short northern plains. This project would be the equivalent of the US diverting part of the Mississippi’s flow to New England.

A major part of China’s plan to clean up the air in its eastern cities involves construction of some 50 plants to gasify coal in the western provinces and send it by pipeline to the eastern cities thereby reducing the need to burn coal in densely populated areas. The only problem is that gasifying the coal releases more carbon into the atmosphere than simply burning it. Environmentalists are very upset about Beijing’s use of coal gasification on this scale. Last week a Houston-based company announced a contract to help build three of these plants.

4. Russia/Ukraine

The budding cold war between Moscow and the West continued last week with Russia promising retaliation if Congress enacts new sanctions against it. The Russians continue to fly provocative reconnaissance missions against Europe including one that the Swedes say nearly collided with an airliner last week. Moscow denounced US non-lethal aid to Ukraine last week and lauded its growing energy sales to China.

The ruble fell to a new low of 58 to the dollar last Friday as Russia’s Central Bank intervened to stem the losses. A 1 percent increase in the interest rate to 10.5 percent on Thursday had little effect. So far the Central Bank has spent about $100 billion of its $400 billion foreign exchange holdings in an effort to support the ruble. Most observers expect that the ruble will continue to fall adding to the country’s economic hardships. So far the government has turned down requests from Russian companies in danger of default. Private companies have some $700 billion in foreign debt with $35 billion coming due in December and $100 billion coming due in 2015. Some analysts believe that the government will ultimately back the businesses which are in trouble rather than let them fail.

Despite the new hardships the country is facing, President Putin and his policies remain generally popular. Putin has had considerable success in shifting the blame for the country’s trouble on the West.

5. Quote of the Week

“The world has such an improved outlook for supplies. Peak oil theorists have been run out of town by American ingenuity.”

— Bill Colton, Exxon’s chief strategist
6. The Briefs

Norway: As oil prices keep falling, BP is among Norwegian oil producers having to take a hard look at whether to kill off aging offshore fields earlier than planned because squeezing out the last barrels might not be worth it. BP is currently deciding on plans for the five fields it operates in Norway. (12/9)
Saudi Arabia’s King Abdullah announced a shake-up of the Kingdom’s government, but kept veteran oil minister Ali al-Naimi in place. Mr. al-Naimi, who has been the kingdom’s oil minister since August 1995, was instrumental in the recent decision by OPEC to keep its oil production target steady, a move that has since sent global oil prices into a tailspin. (12/9)
Kuwait plans to spend about $7 billion to develop heavy-oil fields even with crude prices near five-year lows. The first phase of the Lower Fars heavy-oil project will cost $4.2 billion, with contracts to be awarded by the end of this year. Kuwait Oil Co., which plans to drill 900 wells and pump 60,000 b/d by 2018 in the project’s first phase, targets output of 180,000 b/d by 2025 and 270,000 by 2030. (12/8)
The number of supertankers sailing to China jumped to a record in ship-tracking data amid signs that the oil-price crash is spurring the Asian nation to stockpile. The cost of hiring the vessels surged to the highest in almost five years, according to Baltic Exchange data. (12/13)
Investors in giant LNG terminals from Australia to Canada are facing the prospect of losing billions of dollars plowed into the projects as plunging oil prices darken the outlook for the industry. The decline could wipe out returns for companies such as Chevron and Royal Dutch Shell which have committed nearly $250 billion combined to LNG projects over the past seven years to meet rising Asian demand for the cleaner-burning fuel. To fund their plans, the companies have typically agreed to sell most of the gas up front, ahead of the completion of their projects, at rates linked to oil prices. The oil-linked pricing means LNG producers stand to get much less revenue when they deliver their first shipments than if crude had remained nearer its peak of $116 some six months ago. LNG prices in Asia sunk below $10 per million British thermal units. (12/11)
Nigerian piracy is unique for several reasons. It accounts for 71% percent of all incidents in West Africa, and the methods used by Nigerian pirates are highly profitable. Piracy off the Nigerian coast usually consists of the hijacking of a product tanker and the transfer of the cargo into another vessel—a process that can take several days. (12/12)
Oil imports from Venezuela to the US increased more than 60 percent during the same week that Washington lawmakers looked to tighten sanctions pressure. The EIA said in a status report the United States imported 896,000 barrels of Venezuelan crude oil per day for the week ending Dec. 5, up 66 percent from last week and 14.4 percent year-on-year. (12/12)
Canadian heavy crude fell to near $40 a barrel, threatening projects under construction as producers boosted output and space on a pipeline was rationed. (12/12)
US drilling rigs targeting oil dropped by 29 this week to 1,546, the lowest level since June and the biggest decline since December 2012, Houston-based field services company Baker Hughes Inc. said. The number of rigs targeting U.S. oil is sliding from a record 1,609 following a $50-a-barrel drop in global prices, threatening to slow the shale-drilling boom that has propelled domestic production to the highest level in three decades. (12/13)
US oil exports: It may be premature to ease restrictions on crude oil exports despite early indications of economic benefits, analysts told lawmakers on Capitol Hill. Deborah Gordon, director of energy programs at the Carnegie Endowment for International Peace, testified there were too many uncertainties in the global marketplace as well as in the US crude oil industry to rush ahead with new export policies. With Asian economies slowing down, the appetite for US oil may be dwindling, she said. Furthermore, the shale boom is still a relatively new phenomenon. (12/13)
Refiners in the US used the most oil ever last week, taking advantage of crude prices tumbling to a five-year low. Plants processed 16.6 million barrels a day of crude in the week ended Dec. 5, the most in EIA data going back to 1989. US refiners increased operating rates to above 95 percent for the first time since 2005, increasing gasoline supply and driving down prices at the pump to the lowest level in more than four years. (12/11)
The US refining surge is lifting tanker rates to the highest in at least three years as demand accelerates for vessels carrying the processed fuels to buyers in Latin America and the Caribbean. (12/9)
ExxonMobil, in its yearly energy outlook, affirmed its view that global energy demand will grow 35% by 2040, due to significant global growth in the middle class, an additional 2 billion people in the world and increased strength in emerging economies. It added, however, oil and natural gas will meet about 65% of global demand growth in 2040, up from last year’s prediction of 60%. Also, it foresees North America being a major net exporter of liquid hydrocarbons by 2025. (12/10)
ConocoPhillips said it was trimming its capital spending program for 2015 to $13.5 billion, down 20 percent from 2014. The reduction in capital primarily reflects lower spending on major projects, several of which are nearing completion, as well as the deferral of spending on North American unconventional plays. (12/10)
BP: If energy is turning into a game of shrink to survive, BP is ahead of its rivals. The tens of billions of dollars in disposals — including rigs, platforms and pipelines — that followed the disastrous Gulf of Mexico oil spill in 2010 have reshaped the oil and gas giant. Its “value over volume” mantra, pursued relentlessly, has become a byword for the majors’ efforts to curb costs, strengthen balance sheets and position themselves for a tougher, leaner world of lower oil prices. (12/11)
BP: The U.S. Supreme Court on Monday rejected BP’s challenge to its multibillion-dollar settlement agreement over the 2010 Gulf of Mexico oil spill, which the oil giant complained has allowed payouts to some businesses that are unable to trace their losses to the disaster. The court’s decision not to hear the London-based company’s appeal is the latest setback for BP. (12/9)
Oil on rails: A new report from IHS finds the amount of crude oil carried on the North American rail system should peak by 2016 at 1.5 million barrels per day, up from the 20,000 bpd recorded just five years ago. At its peak, rail will handle more than 10 percent of the North American crude oil production. (12/13)
Oil rail cars: The North Dakota Industrial Commission, in an unprecedented step that comes amid growing concern about the hazards of oil trains moving across the U.S. and Canada, said it will mandate that well operators strip explosive gases from crude-oil that shows a high vapor-pressure reading. The state regulation will go into effect on April 1, 2015.
The companies most bullish on U.S. power aren’t from the energy industry. They are private equity firms, and here’s why: natural gas from the Marcellus. Firms from Panda Power Funds to Energy Investors Funds are financing about 10 gigawatts of new gas-fired plants over the next five years in the 13-state mid-Atlantic grid. Traditional power companies are building less than 4 gigawatts. (12/13)
Commodity manipulation: Almost two-thirds of commodity market participants say that benchmarks used to set the price of everything from crude oil to ethanol to zinc are vulnerable to manipulation, according to a new study. (12/9)
U.S. trucking and diesel: As shippers of everything from toys to tools enjoy as much as $24 billion in savings from lower diesel surcharges next year, trucking companies see an opening to raise freight rates at a pace not seen in about a decade. Unlike previous times when fuel prices fell, stronger economic growth is increasing demand for cargo space while drivers are scarce, which spurs higher rates. (12/11)
Air pollution study: A cadre of citizens taking air samples for a scientific study has found toxic emissions from Wyoming oil and gas operations, some that are many, many times above federal health standards. Deb Thomas of Clark, one of the co-authors of the study, said residents close to increasing oil and gas developments are in peril and have been abandoned by government watchdogs. (12/8)
Electric vehicles: In 2013, there were about 70,000 battery electric vehicles (EVs) and 104,000 plug-in hybrid electric vehicles (PHEVs)—small numbers compared to around 226 million registered vehicles in the United States. Total U.S. sales of plug-in electric vehicles (PEVs) have increased in recent years, but still represent only about 0.7% of new vehicle sales in 2014 so far, up from 0.6% in 2013 and 0.4% in 2012. (12/11)
Charging infrastructure is crucial to the success of electric vehicles and plug-in hybrids. To address this issue, states have established plans to promote the development of infrastructure through financial incentives for the building of new public and private recharging facilities. California, Washington and Oregon have roughly 30% of the 8,815 electric charging stations listed on the Alternative Fuels Data Center site. (12/12)
Warming: Three scientists from the Met Office, the British weather agency, have concluded that human-caused global warming is going to make European summer heat waves “commonplace” by the 2040s. (12/9)