Quote of the Week
The rise in the Saudi Aramco oil rig count had been evolving over a long period. “You need to drill more wells if you are producing 10 million barrels per day and maintaining your spare capacity. It is also a natural phenomenon in the oil business that the more you produce, the more you deplete your reserves and the more rapidly your field capacity declines. You need to drill more wells more frequently, simply to maintain production capacity.”
Sadad al-Husseini, a former senior executive at Aramco
1. Oil and the Global Economy
It was a volatile week as the markets tried to sort out whether or not there would be another price dip prior to the inevitable rebound as supplies return to normal or tighten once again. Prices jumped around in a $3-4 trading range with New York finally settling at $45.72, up 2 percent for the week, and London settling at $55.32, up 0.6 percent. A stronger dollar and the 15th straight weekly decline in active US drilling rigs were enough to overcome a 9.6 million barrel gain in US crude inventories the week before last. The prospect of higher US interest rates and the expiration of the April futures contract added to the volatility.
The debate continues over when the oil price rebound will come. Observers are nearly unanimous that it will take place sometime in the second half of this year but disagree as to whether this rebound will reach three figures or will top out a lower level, below that necessary to support the high cost of producing oil from most shale formations, tar sands, and deep-water wells. The 40 percent drop in active drilling rigs without a noticeable decline in US oil production, has started another debate about how much drilling efficiency has increased of late and just what is happening to the backlog of drilled, but still unfracked wells. Some hold that many drillers are holding off on completing wells until prices are higher. Except for the IEA’s weekly projections, most information on US production lags what is actually happening by at least six weeks.
The Obama administration released a new set of rules for fracked wells on federal land that would require drillers to test cementing of wells, tighten storage of toxic fluids, and publically disclose the chemicals they pump down the wells and dispose of or recycle afterwards. The Independent Petroleum Association immediately denounced the new standards as “unscientific” and has already asked a federal judge to rule them invalid. The Obama Administration also ordered federal agencies to cut emissions by 40 percent over the next decade and switch to electric and plug-in hybrid vehicles. New rules to cut flaring of natural gas are on the way.
2. The Middle East & North Africa
Iraq: The fighting around Tikrit continues with slow progress being made in driving ISIL forces out of the city center. Fears are arising over just what will happen in the Sunni-majority towns retaken back by the Shiite and Iranian forces. Some fear there will be retaliatory massacres by the Shiites as more bodies of those executed by ISIL are found. Others fear that the Shiites will never allow Sunnis to return to their traditional homes. The spectre of an interminable sectarian war in Iraq is looming stronger every day.
There were reports of new tribal conflicts in southern Iraq last week where most of the oil production takes place with help from foreign oil companies. The best government security forces have been pulled out of the region to take part in the drive against ISIL in the north leaving parts of the region with a reduced security presence. A highly unusual truck bomb went off south of Basra last week killing at least three. Should ISIL decide to undertake a major campaign against the southern oil infrastructure, it would be bad news for Baghdad and its thinly stretched forces and possibly hasten foreign intervention.
Libya: A full-scale civil war seems to be breaking out in Libya between forces loyal to the internationally recognized government holed up in Tobruk and the Islamist Libyan Dawn forces that hold Tripoli. Over the weekend, Tobruk forces announced that they had launched an attack to “liberate” Tripoli even as UN sponsored reconciliation talks were taking place in Rabat. On Saturday Tobruk’s forces bombed airfields and a Libyan Dawn military camp. Despite heavy fighting over the weekend, the UN envoy said Sunday that the talks continue and there could be an agreement on a unity government in a day or two.
The Libya National Oil Company says it is not taking orders from either of the rival governments, but is continuing to sell oil and deposit the revenues into the Central Bank of Libya as it has always done. Last week the Tobruk government ordered the oil company to route all payments through an eastern Libya entity that it could control thus sparking the announcement that the oil company was not supporting either side. So far as has been reported, the central bank is continuing to pay the salaries of the numerous Libyans who are government employees no matter which side they are on. Libyan oil production in February was reported at about 300,000 b/d. OPEC says its exports were about 200,000 b/d which agrees with other reports that the offshore fields and those in eastern Libya are still functioning normally.
Iran: The nuclear negotiations. which will play a major part in determining Tehran’s place in the global oil market in the months and years ahead, took a break on Friday and will continue this week just days before the March 31st deadline for an agreement on the outlines of a deal. A major remaining issue is how fast the sanctions will be lifted as part of the agreement with Tehran wanting them all removed immediately and the West wanting to see some degree of compliance with the agreement on the part of the Iranians before the sanctions are totally removed.
A new obstacle arose last week with the French saying the deal must be more robust to guarantee against Tehran ever building an atomic bomb. They also see a 10-year agreement as being too short and that a 25-year agreement restricting Iran’s ability to enrich uranium would be more appropriate. With all sides saying that another extension of the talks would not settle anything, it seems they are headed for a crunch point this week.
If an agreement is reached it seems likely there will be some sort of delay before the sanctions are lifted and Tehran is free to increase its exports for the current 1 million b/d to the 2.5 million it was exporting before the sanctions were imposed in 2012. Most observers believe it would take at least a year to revive exports to the pre-sanction level and that further increases would be limited due to years of under investment in Iran’s production facilities. There is clearly a lot riding on what will happen in the next few weeks including the possibility that Iranian oil could start replacing a share of US shale oil production or increased tensions in the region.
3. China
Beijing’s apparent oil demand in January and February increased by 3 percent year over year to 10.43 million b/d as derived from recently released government data. Beijing does not release data on oil demand or the size of its stockpiles, thereby forcing interested parties to calculate “apparent” demand from import and refinery production data. Much of the increased imports likely are due to ongoing efforts to fill China’s strategic reserve facilities and increased exports of finished oil products from recently completed refineries.
Citigroup sees the annual growth in China’s oil consumption slowing to 2.7 percent in the next five years from 4 percent annually in the period 2000-2011. After 2020, the annual demand growth could average only 2.3 percent as Beijing’s economy continues to slow.
4. Russia/Ukraine
The ruble had a good week, advancing 1.5 percent against the dollar as corporate tax payments of $21 billion are due at the end of the month increasing the demand for rubles. Russia’s economy minister announced that inflation in the country had now reached 17 percent and is likely to stay at this level for some time amid hopes that the situation will be better later this year.
In the meantime, the EU is moving to extend it sanctions on Russia for its recent actions in Ukraine. The new resolution ties the sanctions to Moscow’s observance of the Minsk Agreement and would come into effect upon the expiration of the current sanctions in July. Moscow immediately denounced the sanctions as “destructive” and said it will act in its national interest which presumably means continued support for the Ukrainian separatists. There are reports that the pro-Russian rebels are planning an offensive to expand their territory, a move that would end the ceasefire agreement.
Fresh talks on Russian natural gas supplies to Ukraine are due to begin this week. Little progress is expected. Ukraine is asking to double its gas transit fees for the natural gas being shipped to the EU as a way to bolster its sagging economy.
5. Climate Change
In the past week there have been a number of disturbing stories about the speed with which the earth’s climate is deteriorating. Reports concerning both the north and south poles suggest that the Polar Regions are melting faster all the time. Winter artic ice seems to be setting new lows this year and the Antarctic is now melting so fast that a 10 foot sea level rise, and even more in the northern hemisphere, later in the century seems inevitable. Unfortunately “later in the century” still does not carry much weight with those who believe it is too soon to start dealing with climate change despite the economic costs.
Of more immediate concern is the ongoing drought in California. Last week there were reports that much of the state is turning back into desert and that “California has only one year of water left.” If severe water shortages do develop soon cutting the state’s agricultural production, this could be enough to get the attention of the Congress. At some point there could be a significant change in sentiment and some serious legislation to restrict carbon emissions might be enacted in the next few years.
In the meantime, President Obama has issued an order mandating cuts in greenhouse gas emissions for federal agencies. Emissions are to be cut by 40 percent over the next 10 years and agencies are to begin switching over to electric or plug-in hybrid vehicles.
Reining in overseas drilling for shale oil: After spending more than five years and billions of dollars trying to re-create the US shale boom overseas, some of the world’s biggest oil companies are starting to give up amid a world-wide collapse in crude prices. Chevron Corp., Exxon Mobil Corp. and Royal Dutch Shell PLC have packed up nearly all of their hydraulic fracturing wildcatting in Europe, Russia, and China. The reasons vary from sanctions in Russia, a ban in France, a moratorium in Germany and poor results in Poland to crude prices below what it can cost to produce a barrel of shale oil. (3/19)
Saudi rig count: As the global energy industry stares transfixed at a spectacular drop in active US drilling rigs, Saudi Arabia is ramping up the number of machines drilling for oil and gas despite a sharp fall in the price of crude. Industry sources and analysts say the Saudis are looking beyond the current oil situation. State oil giant Saudi Aramco used a record 210 oil and gas rigs in 2014, up from around 150 in 2013, 140 in 2012 and some 100 in 2011, according to industry estimates. (3/21)
Saudi Aramco hiring? Workers fired from US shale fields after the collapse in oil prices could soon have a new boss: the nation some blame for driving that decline. Saudi Aramco is posting new job ads online aiming to snap up experts in extracting oil from shale as the country seeks to become a leader in that rapidly expanding effort. (3/17)
Saudi Arabia’s plans to expand local refineries while maintaining its share of the global crude market point to one thing: higher production. The world’s largest oil exporter will probably increase output this year to feed new refineries, deepening a global supply glut, according to analysts. (3/17)
OPEC: US shale drilling may be slowing, but not fast enough for OPEC to change policy at its June meeting or to prevent oil prices from possibly falling more, in the view of the group’s Gulf members. Actual oil output from the United States could prove harder to beat back, sources in the Gulf say after poring over the latest data with top consultants. (3/20)
OPEC efforts to bring non-member countries such as Russia on board in cutting output have made little progress, officials say, and even the chance of more Iranian exports hitting prices if sanctions end is unlikely to boost cooperation. (3/19)
Recent efforts by OPEC and other government agencies to improve the transparency of oil markets through programs such as the Joint Originations Data Initiative (JODI) appear to be gradually succeeding. Those efforts come at a time when OPEC is defending market share from rival suppliers. There is still room for improvement; Venezuela told OPEC it pumped 2.74 million b/d in February, while the secondary sources estimated production at 2.34 million b/d. Secondary sources also put Iraq’s February production 540,000 bpd higher than Iraq itself. (3/17)
China plans to allow foreign investors to trade its proposed crude futures contract as the world’s second-largest oil consumer seeks to bolster its influence in determining benchmark prices. China wants more control over oil pricing as its reliance on crude imports increases. (3/19)
Norway’s Statoil became the first major oil company to publish its payments to governments under a new, mandatory transparency standard being rolled out across the world. As the Securities and Exchange Commission works to create a similar transparency rule for US-listed oil and mining companies, campaigners in the Publish What You Pay coalition are calling on US regulators to follow Norway’s lead. (3/20)
The UK’s Brent benchmark—a crucial metric for global oil prices—will, in a few years, contain no actual Brent at all. With aging North Sea fields running out of crude faster than predicted, changes to how the global price of oil is calculated are being accelerated. (3/20)
Ethiopia’s plans to build Africa’s largest hydroelectric dam on the Nile have sparked tensions with Egypt, which depends on the river to irrigate its arid land. But after years of tensions, an international agreement to share the Nile’s waters may be in sight. (3/16)
Egypt signed a deal to import 35 shipments of liquefied natural gas (LNG) over five years with Russian energy company Gazprom on Tuesday, the Petroleum Ministry said in a statement. Gazprom has an 18 percent share of global natural gas reserves. These and other LNG import agreements are part of Egypt’s plan to import natural gas in order to meet fuel demands of electric power plants. (3/18)
In Egypt, Italian energy company Eni said it signed a framework agreement to develop oil and gas reserves that calls for as much as $5 billion in investments. The investments are directed to the development of 200 million barrels of oil and 1.3 trillion cubic feet of natural gas. (3/17)
Off the coast of Libya, Eni said it made what it considers to be a significant discovery of natural gas. Proximity to existing production infrastructure will allow for rapid development. (3/17)
Nigeria’s credit rating was downgraded by Standard & Poor’s because of falling oil prices and rising political risks before delayed elections due next week in the West African country. The foreign and local currency long-term rating was cut one level to B+, four levels below investment grade. (3/21)
Canadian heavy oil prices fell below $30 for the first time in more than six years as Bank of Montreal warned that oil sands producers must cut costs. Canadian Oil Sands Ltd., among the largest five producers, needs a WTI price of about $50 a barrel to sustain its business. Smaller companies working in Alberta are facing financial troubles. Southern Pacific Resource has defaulted on debt and Connacher Oil and Gas says it’s in danger of not being able to pay creditors. (3/17)
In Calgary, another round of oil job cuts is rolling through downtown this week with three producers eliminating at least 650 positions as they wrestle with prices near a six-year low. ConocoPhillips is the latest, announcing Wednesday it’s terminating 200 people, about seven percent of the Houston-based company’s Canadian workforce. That follows cuts Tuesday by Talisman Energy Inc., which is eliminating 150 to 200 positions in its Calgary head office and Cnooc Ltd.’s Nexen Energy, which is reducing its Canadian headcount by 300. (3/19)
In Canada, cheaper North American oil is poised to replace West African and Middle East cargoes at eastern Canadian refineries with US crude prices at the lowest level compared with the international benchmark in 14 months. Canada, the world’s fifth-largest oil supplier, produces most of its oil in the western province of Alberta and exports it south to the US. A lack of east-west pipelines means Canada’s eastern refineries depend on imports by tanker and train. (3/19)
The US oil rig count continued to fall this week in response to lower crude prices, although output continues to climb and debate rises on the impact of a backlog of uncompleted wells. On Friday, 825 oil rigs were working domestically, down 41 from last week and down 784 from October 10, according to the Baker Hughes weekly rig count. Including 242 gas rigs (down 15 from last week) the total US rig count of 1,069 is the lowest count since October 2009, and 734 fewer units compared with this week a year ago. In the Permian basin, the majority of rigs being shut down are less-productive vertical rigs, not horizontal units. (3/21)
U.S. oil inventories: With lower US refinery runs and increases in domestic crude oil production, US commercial crude oil inventories at the end of February provided the most days of supply since the mid-1980s. (3/20)
Total US petroleum demand reached an average 19.3 million b/d in February—the highest level for the month since 2008, the American Petroleum Institute reported last week. The amount represented a 1.5 percent year-on-year increase. Greater demand for gasoline and jet fuel and a colder-than-usual February brought total February deliveries back to pre-recession levels. (3/21)
Oil backer banks hurting: Goldman Sachs Group Inc., UBS AG and other large banks face tens of millions of dollars in losses on loans they made to energy companies last year, a sign of investor jitters in a sector battered by the oil slump. The banks intended to sell the loans to investors but have struggled to unload them even after cutting prices, thanks to a nine-month-long oil price crash. Wall Street’s losses on the loans could have a chilling effect on some oil companies’ ability to fund their operations as investors take a more cautious view of the sector. (3/19)
End banks’ exemption? US lawmakers should consider overturning a decades-old rule that allows Morgan Stanley and Goldman Sachs to extract, transport and trade physical commodities, a top Federal Reserve official said on Thursday. One target is the commodities exemption the two banks enjoy, which allows them to handle everything from crude oil cargoes and copper pallets to electricity lines and aluminum stockpiles. (3/20)
Rail shipments of crude and refined products fell last week to the lowest level since October 2013 after a derailment shut a track in Illinois for four days. (3/19)
In Colorado, revenue growth for the next fiscal year will be lower by $43.7 million in part because of the slowdown in the oil industry, a state budget report said. (3/20)
North Dakota’s Office of Management and Budget has decreased the oil revenue they expect over the next two years by $870 million. The decline in oil revenue anticipated–$3.4 billion vs. $4.1 billion—is largely due to two taxes which will be cut due to sustained lower oil prices. (3/19)
ConocoPhillips said last Tuesday that it was cutting spending by over 25 percent in order to stay competitive in the low oil price cycle. The company plans capital expenditures of $11.5 billion per year through 2017, down 28 percent from its earlier expectations. They expect their production to climb 13 percent to touch 1.7 million barrels of oil equivalent per day in 2017; the company produced 1.5 million b/d of oil and gas in 2014, a 4 percent rise from 2013. (3/19)
Statements made by BP about the current condition of the US Gulf Coast’s environment after the Deepwater Horizon incident are off the mark, state and federal trustees said. BP said "The gulf is showing strong signs of environmental recovery, primarily due to its natural resilience and the unprecedented response and cleanup efforts.” The trustees countered that BP "misinterprets and misapplies" data and findings about the extent of the damage to the regional environment. (3/18)
Coal boom slowing: Based on data CoalSwarm compiled of every coal plant proposed worldwide for the past five years, a new report finds that for every coal plant that came online, plans for two other plants were put on hold or scrapped altogether. (3/19)
German hard coal imports reached an all-time record high of 56.2 million mt in 2014, up 6.2 percent on the year, according to statistics released by the German Coal Importers Association Thursday. (3/21)
