Peak Oil Review – Dec 29

Contents
1.  Oil and the Global Economy
2.  The Middle East & North Africa
3.  China
4.  Russia/Ukraine
5.  Quote of the Week
6.  The Briefs
 
1.  Oil and the Global Economy
 
Oil prices were little changed for the week on Friday with WTI just below $55 a barrel, and London’s Brent just below $60. Upswings in the past week came from the occasional piece of better economic news while the down swings came on bearish fundamentals. For example, US crude stocks grew by 7.3 million barrels the week before last while analysts were expecting a 1.8 million barrel decline.  After weeks of rapid drops, oil prices have been relatively steady for the last two weeks, prompting speculators to return to the markets on the theory that the bear market is about over.  Others are not so sure.
 
Although slow in coming, repercussions from the six-month decline in oil prices are starting to appear. Numerous drilling companies have announced major cutbacks in their capital expenditures for next year and drilling rig counts are starting to decline. These cutbacks are already affecting the oil services industry and government revenues in oil producing states in the US and in oil exporting countries around the world. Thus far the US is having a rather mild winter, which may allow North Dakota to keep increasing its production for the next few months rather than slowing due to bad weather.  The state currently has some 650 wells or a 2-3 month backlog of wells that have been drilled and are awaiting fracking.
 
Given the number and size of drilling cutbacks that have been announced in recent weeks, it now seems likely that US shale oil production will see a drop in the coming year rather than a slower pace of production increases as had been previously forecast.  US shale-drilling operations are unique in the world in that they are being carried out by dozens of small companies, unlike in Saudi Arabia, where 10 million b/d of oil is produced by one company.  In the US many shale drillers are so small that they must either keep producing or close down.
 
The Saudis reassured the markets last week that they are prepared to ride out the price slump without cutting production no matter how low prices go.  However, some Saudis said that oil prices will be up to $70 a barrel by the end of 2015, which briefly gave a boost to the markets.
 
After a sudden drop from circa $3.65 per million BTU’s the week before last, natural gas futures continued to decline last week and are now trading just above $3.  The sharp decline in natural gas prices, which were trading about $4.70 in late November, was caused by abnormally mild weather across much of the US and continuing increases in natural gas production.
 
2.  The Middle East & North Africa
 
Iraq: There was little news about Iraq’s oil industry last week. A new budget, which incorporates the collapse in oil prices, was sent to the parliament for approval along with the Kurdish oil deal that regulates the marketing of oil from Kurdish oil fields.  US airstrikes against ISIL targets continued and an occasional suicide bombing took place in Baghdad.
 
The effort to unify Iraq into one nation is making little progress as the struggle against ISIL only deepens sectarian animosities. An order from the new prime minister instructing military units to fly Iraq’s national flag has been ignored. Even the checkpoint for the government’s Green Zone in Baghdad is flying a Shiite rather than a national flag.
 
Foreign observers are noting a major buildup in US military equipment in Kuwait, which is likely in preparation for a major offensive against ISIL forces in the coming year.
 
Libya: The country is looking more like a nation in the throes of a civil war all the time. Two weeks ago the Islamists in Mistrata sent a convoy of fighters and speedboats to seize Libya’s two major oil terminals at al-Sidra and Ras Lanuf. Although the ground assault was beaten back by the Petroleum Facilities Guard, which protects the terminals when it is not striking for higher pay, and air strikes, sent by the Tobruk government, rocket fire from the speedboats set an oil tank on fire, which at last report had spread threatening the facility. There are 19 storage tanks at the terminal with a total storage capacity of 6.2 million barrels. So far the fire has consumed at least 1.6 million barrels of crude.
 
In retaliation, the internationally recognized government at Tobruk launched air attacks on Mistrata which is the Islamist stronghold. Among targets were a steel mill, the port and a military facility. The Islamists said the strikes did no good.
 
During the week, there was an attack on Libya’s fourth largest oil export terminal at Mellitah in the west that seems to have done little damage. It is doubtful, however, that Libya is exporting much oil at the minute, and given the escalation in the fighting, it is likely that it will be sometime before the country becomes a major crude exporter again.
 
Iran:  Although the government has had considerable success in reducing unemployment and bringing down the inflation rate to only 20 percent in the past year, economic progress has been badly hampered by the plunge in oil prices and the failure to reach a nuclear agreement. Given that the sanctions have reduced Tehran’s oil exports by some 50 percent and the price decline has cut revenues by another fifty, the government’s oil revenues are now roughly a quarter of their size a few years ago. The new budget assumes that oil prices will average an optimistic $72 a barrel in the coming year, while the IMF says that Tehran needs $137 a barrel to cover its budget. The bright side of the sanctions however, is that Tehran now is dependent on oil exports for only 22 percent of its GDP as compared to 46 percent for Iraq and Saudi Arabia.
 
The Rouhani government’s reform efforts also are hampered by the existence of massive religious foundations and companies owned by the Revolutionary Guards, which do not pay taxes. It will take the intervention of the Supreme Leader to change the policies which place religious organizations and military-owned industries beyond the reach of taxation.
 
In a recent speech President Rouhani vowed to maintain the major pillars of Iran’s foreign policy such as support for the Assad government in Syria, the Shiite government in Iraq, and Hezbollah in Lebanon. The President, however, pleaded with the more reactionary elements in Tehran to stop opposing progress on the nuclear treaty and get the sanctions lifted as soon as possible. Should the sanctions be lifted in the coming year, however, it would only add to the oil glut and further reduce prices.
 
3.  China

Beijing cut retail gasoline prices again last week for the 10^th time since July.  It is government policy to cut prices whenever international crude falls by 50 yuan per ton during a time span of 10 working days.
 
One of the major questions relating to a revival of global oil prices is just what China’s oil consumption will be in the coming year. For now China’s imports remain fairly healthy, increasing by 9 percent this year because the country has opened several large new refineries in the past year and has begun exporting oil products. The government is also taking advantage of the low oil prices to build its strategic petroleum reserve.  Neither of these sources of demand, however, have anything to do with China’s actual oil consumption. Oil for the strategic reserve is hoarding, not consumption and the export of oil products is simply taking customers from other refiners.
 
Between 2009 and 2013, China’s economy boomed and increases in the demand for oil averaged around 6.5 percent a year. Now that China’s economic growth has slowed, the question is what the demand for oil will look like in the future. As China does not publish estimates for oil consumption, outside analysts have to work backward from refinery output, domestic production, imports, product inventory figures, and a lot of guesswork to arrive at an “apparent consumption.” For 2014 various China watchers put the country’s consumption growth at anywhere from 1.1 to 3.4 percent which is quite a drop from recent years. China’s drop in demand growth is probably a major constituent of the worldwide demand glut, which is driving down prices.
 
With China’s official GDP growth running around 7 percent in 2015, we would normally see an increase in oil demand on the order of 3.5 percent to support this growth.  There are however, many clouds on the horizon. While many of China’s economic figures are fudged, industrial production and the housing boom is definitely slowing. Looming over all this is the coming drop in coal mining and transportation, which consumes prodigious amounts of diesel. While the question is still up in the air, we could see a decided drop in China’s oil consumption and weaker global demand in 2015.

As several observers have pointed out, Russia does not really have an economy anymore, but an oil and gas exporting business, which supplies much of the government’s income.  This year has been one of the most volatile since the fall of the Soviet Union 23 years ago. The troubles came when Russia pressured the pro-Russian president of Ukraine to drop a plan to move closer to the EU. This resulted in the overthrow of the Ukrainian government, the Russian incursion, takeover of the Crimea, and Western sanctions. The drop in oil prices which is Moscow’s major source of income set off an economic storm which sent the ruble from 33 to the dollar down to a low of 80 on December 16h and now back to 54 to the dollar. Last week the Kremlin ordered state owned businesses to convert their foreign currency holdings into rubles which gave the ruble a record one-time bounce.
 
There is little doubt that Russia is on the way into what may be a deep recession in the coming year. Government ministers are talking about a 4 percent drop in GDP next year.  Inflation is expected to be around 10 percent as Moscow’s retaliation for the sanctions banned the import of cheap food and other goods from the US and EU. The government is already using its reserve funds to bail out failing banks and will likely have to bail out many companies who have debts in the next few years, depleting its foreign exchange reserves.
 
While Moscow has been reassuring its public that the ruble crisis is over, some are saying that another $10 drop in in oil prices will be too much for Moscow to handle and the ruble will simply collapse should oil fall to $50 a barrel. S&P announced last week that it is contemplating cutting the ratings on Russian debt to junk status.
 
 The crisis is beginning to be felt in Russia’s oil business. The deputy prime minister said last week that Russia may cut its oil production next year and that Russian output could shrink by some 10 percent or 1 million b/d in the next 2-3 years. Moscow also announced that it is postponing plans to drill for oil in the Arctic as the sanctions are blocking western oil companies with the needed technology from participating in partnerships.
This bodes ill for Russian oil production in coming years as Moscow was looking to Arctic oil to maintain production levels as older fields deplete.
 
Last week Ukraine retaliated for all the havoc that Russia has created in its country by cutting power, train and bus, and even credit card services to Crimea, and by voting to drop its non-aligned status and seek NATO membership.
 
5.  Quote of the Week

•  “Taking into account the future decline of shale production in the U.S. and Canada, it is Venezuelan oil that can become the substitutional element for the receding volumes of those markets.”                            —  Igor Sechin, CEO of Russia’s Rosneft

 
6.  The Brief

• European IOC’s crashing cash flows: The US shale-oil industry has made another enemy: Europe’s largest crude explorers. Standard & Poor’s Ratings Services revised its outlook to negative for Royal Dutch Shell, Total SA and BP as the oil-market rout driven by weakening demand and a flood of supply from American shale fields threatens cash flow into 2016. The credit-rating company also cast a dim eye on Houston-based ConocoPhillips, saying it is facing similar cash flow pressure. S&P cited “the dramatic deterioration in the oil price outlook” and the 50 percent increase in debt loads for the biggest European oil producers since the end of 2008.  (12/24)

• The UK’s oil industry is in “crisis” as prices drop, a senior industry leader has told the BBC. Oil companies and service providers are cutting staff and investment to save money. Robin Allan, chairman of the independent explorers’ association, told the BBC that the industry was “close to collapse”. Almost no new projects in the North Sea are profitable with oil below $60 a barrel, he claims. (12/22)

• Scotland’s North Sea revenues would have slumped to one-fifth of Holyrood’s preferred forecasts in its first year of independence if Scots had voted Yes in September, according to an Office for Budget Responsibility.  (12/22)

• BP in Russia:  BP may buy a direct $700 to $800 million stake in an East Siberian oil producer from OAO Rosneft, the Russian oil producer facing U.S. and European financing bans. BP has remained committed to its partnership with Rosneft, in which it holds 20 percent, as Russia ’s relations with the U.S. and Europe sour over the conflict in Ukraine. (12/26)

• Russia’s largest privately owned oil company Lukoil said it sold its share in a Venezuelan project to state-controlled oil giant Rosneft. Rosneft said its share in the National Oil Consortium, the company that is developing the project called PetroMiranda, rose to 80%. Gazprom Neft, the oil arm of Russia’s natural gas monopoly Gazprom, owns 20%. (12/24)

• Russian oil company Rosneft said Monday it may have to postpone its drilling program in the arctic temporarily, but doesn’t rule out future operations. A company official said the company was rethinking its current programs because of a lack of viable partners. (12/23)

• Kashagan again: Italian energy company Eni said Monday it was committed to getting the Kashagan oil project in Kazakhstan, one of the world’s largest, up and running.  In February, the EIA said it expected Kashagan to return to service in 2015, but below its initial production target of 370,000 barrels per day because technical challenges and high development costs may limit its expansion. Two months later, experts reviewing the pipeline issues at the field said it may cost as much as 15 times more than initially expected to restart the field. (12/23)

• Saudi economy:  Authorities pledged to curb wages and push ahead with investments next year as the world’s largest oil exporter seeks to counter the effect of tumbling crude prices on the economy. The Saudi government said it expects the budget deficit in 2015 to widen to 145 billion riyals ($39 billion), about 5 percent of gross domestic product and roughly triple this year’s deficit. (12/26)

• Iraq’s largest oil refinery still faces enormous obstacles before it can resume operations, one month after Iraqi forces regained control of the city of Baiji from insurgents led by the Islamic State group. Officials said it could take more than a year to get it operating again. (12/23)

• In Yemen, the Canadian unit of China National Offshore Oil Corp., or Cnooc, said Sunday it has halted oil production in Yemen due to an unspecified “security threat” to its personnel in the Arabian country. (12/22)

• A Kurdish rebel commander has warned that fighting in Turkey’s southeast could resume by June if efforts to end a 30-year insurgency make no progress. (12/24) 

• Israel ’s fledgling natural gas industry was rattled over a threat by the country’s antitrust regulator to break an American-Israeli group’s hold on the country’s gas resources. Israeli officials said that they are concerned that Noble Energy, a Houston-based oil company, and its partners, Delek Drilling and Avner Oil Exploration, had a lock on Israeli gas production. Noble and its partners produce nearly all of Israel’s gas from an offshore field called Tamar, and that gas is used to generate about half of the country’s electric power. (12/24)

• Africa: The sharp decline in world petroleum prices is threatening to undermine the fragile economies of several African countries dependent on oil. The most vulnerable in the world’s poorest continent include Nigeria, Angola, Equatorial Guinea, Gabon and Sudan – as well as developing nations such as Algeria, Libya and Egypt in North Africa. (12/26)

• Morocco could be emerging as a major regional player in terms of potential natural gas production, companies working on fledgling campaigns there said Monday. Circle Oil, a British energy company focused on Middle East and North Africa, announced what it considers to be a significant natural gas discovery in Morocco. (12/23)

• South Sudan has signed an agreement with China National Petroleum Co., or CNPC, to boost oil production in at least three blocks, officials said Monday as the war-ravaged nation attempts to heal its battered oil industry. (12/23)

• In Nigeria, Royal Dutch Shell said it loses on average 30,000 barrels of crude oil every day to thieves, and it is worried that the rate of oil theft in the Niger Delta area is increasing. (12/26)

• Nigerian crude oil exports in February are set to fall to around 1.87 million b/d from around 2.03 million in January during the time when the Saudi-led OPEC declared it won’t cut production. Nigeria’s export levels for February are expected to be lower due to maintenance by ExxonMobil at its Eket terminal. (12/24)

• In Nigeria, the tumbling oil prices that have slashed revenue and roiled currency and stock markets in Africa’s biggest economy may have a silver lining: it’s an excuse for the government to scrap fuel subsidies that cost as much as $7 billion a year. (12/24)

• In Venezuela, the slide in oil prices is hitting the country hard, raising questions among investors about the South American country’s ability to pay its debts and heightening concerns about the health of developing economies around the world. A nearly 50% drop in the price of crude since mid-June has left Venezuela’s finances in shambles. The price of credit-default swaps on Venezuela debt, a type of insurance, indicate a 61% chance of default. (12/22)

• U.S. oil industry job losses: After a roughly 50% plunge in oil prices, exploration and production companies are cutting capital budgets, service companies are weighing layoffs and non-energy firms that popped up to support the industry are bracing for a protracted slowdown. (12-27)

• The U.S. EPA is trying to complete a rule governing carbon emissions from power plants, and among the most complicated and contentious issues is how to treat existing nuclear power plants. Many of them are threatened with shutdowns because cheap natural gas has made their reactors uncompetitive. (12/27)

• Chesapeake Energy Corp. has completed a sale of West Virginia and Pennsylvania assets to Southwestern Energy Co. for $4.9 billion. The price, originally $5.3 billion, was adjusted for certain items including Southwestern’s waiver of future claims related to title defects and environmental liabilities. The sale was expected to help Chesapeake reduce a substantial amount of debt accumulated under former CEO Aubrey McClendon. (12/23)

• North Dakota’s booming economy, fed largely by the oil boom, is drawing in new residents at a record pace. The state’s population has increased 2.2 percent since last year, the fastest pace of any state in the nation. The population in North Dakota is 739,482, an all-time high. (12/26)

• Continental Resources continues to cut its 2015 budget in response to falling oil prices. The exploration and production company said Monday that it plans to spend $2.7 billion on capital expenditures next year. That’s down from the $4.6 billion budget it announced last month, which itself was a cut from its original $5.2 billion target. The company also dramatically reduced its planned production growth. (12/24)

•  In North Dakota, tougher rules on shipping crude by rail mean oil producers in the Bakken region could soon face the unwelcome choice of spending more to ship by truck or cutting back on production altogether. That’s the takeaway from a Wall Street Journal report that says that the Railway Supply Institute is warning that tens of thousands of rail cars will be sidelined because they no longer meet code in the wake of new safety regulations on shipping crude oil by train. (12/24) 

• The North Dakota Department of Health proposed new limits on December 12^th for oil waste disposal that would drastically alter the way the industry does business in the Bakken region. This comes after a study conducted by Argonne National Laboratory concluded that the level of radioactive material found in waste can actually be much higher than current rates and still be safe for oil and landfill workers. (12/24)

• The price for a gallon of gasoline in the US hit $2.38 last Tuesday, reported motor club AAA. It has declined every day since Sept. 25, or 89 days in row, which is longer than any period on record for the motor club. The decline streak breaks the previous 86-day record set in 2008, when the global economy slipped into recession. (12/24)