Peak Oil Review – May 4

1.  Oil and the Global Economy
 
Oil prices continued to climb last week with New York futures trading just below $60 a barrel on Friday and London just below $67 before closing somewhat lower on Friday. As has been the case for the last six weeks, trader expectations that US shale oil production will start dropping soon, coupled with the increasing violence in the Middle East, were behind the higher prices.
 
Many analysts do not believe the fundamentals are as yet sufficiently strong to support higher prices, noting that OPEC production from Saudi Arabia and Iraq has continued to grow; the worldwide glut of oil which is likely on the order of 1-2 million b/d is still with us; and the economies of the US, China, the EU, Russia, and that of their trading partners are not doing that well.
 
Some analysts believe that US crude production already has been falling for several months and will continue to decline unless prices rise considerably higher.  This will be confirmed in another month or two when actual production data rather than EIA’s production estimates are released. These analysts believe that the US crude prices are too low to support the completion of all but the most promising and likely to be high producing wells. The US rig count continues to fall, and those remaining are drilling in only the most productive spots where the initial production is likely to be well above the average for wells that have been drilled recently.
 
There have been several developments in recent years that have brought down the costs of drilling and fracking wells. These mostly involve drilling numerous wells from the same platform and then fracking multiple wells at once. This eliminates the downtime and expense of moving equipment between multiple drilling sites and results in a lower cost per well.  The other side of the coin however is that the more productive “sweet spots” are being drilled more rapidly, suggesting that production declines will be faster in coming years as the average well will be less productive.
 
There was some bad economic news last week when new data showed that US GDP growth slowed to an annual rate of only 0.2 percent in the first quarter, down from 2.2 percent in the last quarter of 2014. Some of this was caused by bad winter weather and low oil prices which have not given the economic bounce that many expected. The Federal Reserve noted the weak economic growth in a special statement suggesting that quantitative easing will be with us a while longer.  The EIA also noted last week that US energy demand is expected to grow by a modest 0.3 percent a year for the next 25 years. The administration forecasts that energy used in homes will remain flat and that transportation consumption will decline slightly as much higher fuel efficiency balances off an increasing vehicle fleet.
 
How all this plays out in the next few years is difficult to foresee.  US shale oil production seems likely to decline in the next six months. This in turn should lead to higher prices, which in turn could slow or reverse the decline later in the year or in 2016. The US has a large backlog of unfracked wells that could be brought into production more quickly than starting from scratch. Then we have the Middle East violence, which is clearly on the upswing with the Assad government in danger; ISIS still on the move despite the US bombing; and the Saudis becoming directly involved in the fighting in Yemen. The nuclear agreement with Iran still seems to be still up in the air with factions on both sides seeking to kill the agreement in its present form in hopes that another day will bring a more favorable outcome from their point of view. All this says that the loss of some or a considerable portion of Middle Eastern oil exports remains a distinct possibility.
 
Despite endless talk of the economic recovery, the major world economies are not doing well and there are some very expensive “must-do” programs looming on the horizon such as mitigating climate change and dealing with mass migrations as wars and droughts displace increasing numbers from their homelands. The prospects for significantly increasing demand for increasingly expensive fossil fuels does not seem that good over the next decade.
 
US natural gas futures hit a five-week high on Friday, climbing from $2.49 per million BTUs on Monday to touch $2.80 on Friday. Some of the jump was due to technical factors with traders closing out short positions that saw natural gas futures fall from $3.10 in February to lows earlier this week. Smaller than expected additions to US inventories the week before last also suggested to traders that the pace of US natural gas production may be easing due to low prices.  The EIA expects that the US will become a net exporter of natural gas by 2017 as the US continues to produce excess amounts of natural gas; more LNG export terminals come online; and exports to Mexico by pipeline continue to grow.
 
2.  The Middle East & North Africa
 
Iraq/Syria: The Baghdad government is largely being held together by US and coalition airpower, which is keeping ISIL from moving large forces against government positions, and by Iran, which has organized Iraq’s Shiites in an effort to drive ISIL back into Syria. There have been some successes, as ISIL can’t withstand precision bombing of its positions for long, but in general ISIL seems to have the initiative in Anbar province. Last week there were reports that ISIL has overrun key parts of the Baiji refinery north of Baghdad. There has been a spike in car bombings in and around Baghdad in the last few days as thousands of refugees pour in to Baghdad to escape the fighting in Anbar.  
 
Last week the EU’s director of humanitarian aid warned that the situation in Iraq was deteriorating rapidly.  The number of refugees in Iraq has quadrupled in the past year amid signs of aid “donor exhaustion” as the need for humanitarian assistance in Yemen and Syria and surrounding countries is increasing rapidly.
 
Despite its problems, Iraq’s oil ministry announced that crude exports increased in April to a record 3.08 million b/d up from 2.98 in March.  The government is basing its 2015 budget on average exports of 3.3 million b/d during the year. Iraq hopes to begin exporting a stream of Basra heavy crude soon that will add to its exports. This shows that the world’s major oil companies can increase Iraq’s “easy-to-produce” oil as long as the fighting stays away from the southern oil fields.
 
After four years of civil war, some sort of end game seems to be approaching in Syria. As newly invigorated rebel forces move into the Alawite strongholds in northwestern Iraq, many are saying that the Assad government cannot last much longer. Others, however, hold that with backing from Moscow, Tehran, and Hezbollah, Assad should be able to hold own for a while longer, maybe even a year or two. Moscow, of course has its own problems with the civil war in Ukraine, and Tehran has just opened a new Yemen front in the ongoing war with the Sunnis.
 
Some are predicting that the Syrian civil war could end in a regional disaster, with Jihadist forces taking over the country and threatening Jordan and Hezbollah in Lebanon. For now the Israelis are content to stay out of the fighting so long as Iran does not try to move long range missiles or advanced air defense systems in to Lebanon. However, given the tensions in the region, the possibility of a multi-front regional war breaking out is clearly increasing.
 
Yemen/Saudi Arabia:  The fighting continues with reports that the Saudis are using US-supplied cluster bombs against Houthi targets. Over the weekend there were reports that limited numbers of Saudi Special Forces landed in Aden to support the Sunni defenders of the city. There also have been skirmishes between Saudi forces dug in on Yemen’s northern border and Houthis. The humanitarian crisis grows worse as the Saudi blockade is keeping food and medical supplies as well as munitions from entering the country and the major airfields have been cratered by Saudi bombing.
 
The new Saudi government of King Salman is moving quickly to establish its control of the country by naming new heirs, shaking up the government, and removing control of Saudi Aramco from direct oil ministry supervision.  The appointment of a non-royal, a former Saudi ambassador to the US, as foreign minister helps cement relations with Washington at the time when Riyadh clearly needs its old friends if it is survive the increasingly direct confrontation with Iran.
 
The new Saudi government is clearly more activist by intervening in the Yemen civil war and by supplying enough aid to Sunni insurgents, via Turkey, to allow them to go on the offensive against the Assad government. Whether this growing involvement in regional violence will rebound on the narrowly based Saudi government is one of the key questions regarding uninterrupted oil exports from the region. Although there is no real alternative to the Saudi royal family at the moment, Tehran already is saying that the attacks in Yemen will topple the monarchy.
 
Saudi Arabia’s foreign reserves are starting to drop due to the decline in oil prices and increased spending by the new government, including bonuses for troops involved in the Yemen war.  Foreign reserves have dropped by $47 billion since October and are now in the vicinity of $700 billion. Some note that the Saudi’s knee-jerk reaction to political problems is to distribute more money to its people. The country has sufficient reserves to continue drawing down reserves for a couple of years more, but a policy of buying off potential opponents with gifts and subsidies has its limits.
 
Iran:  It was a busy week for Tehran, which has much on its plate for a nation with a sagging economy and a troubled oil industry.  In Syria, its longtime client President Assad suffered some serious military setbacks. Should radical Sunnis take over the country, Iran will have a hard time supplying its Hezbollah friends in Lebanon. In Iraq, government forces supported by Iran are finding it hard going against the Islamic State. In Yemen Saudi aircraft continue to pound the Houthi rebels – another Iranian client state.  To top it off, Iran’s Revolutionary Guard seized a Marshall Island flagged cargo ship transiting the Straits of Hormuz on the grounds that there was a commercial suit pending against shipping company for an incident 12 years ago. As Revolutionary Guard harassment of ships transiting the Straits has increased of late, the incident resulted in the dispatch of US warships to guard the passage.
 
Iran is a divided country with some clerics and the Revolutionary Guard trying as hard as the Republicans in the US congress to torpedo the nuclear agreement.  The Ayatollah, however, has said an agreement may open the door to better relations with the West and a major boot to Iran’s economy. Last week Iran’s foreign minister said his country was ready for peace talks on Syria and Yemen, but the US says there will have to be concrete steps to curtail assistance to Assad, Hezbollah, and the Houthis before talks can take place.  In the meantime, the nuclear talks continue with both sides expressing optimism.
 
3.  China
 
Beijing’s economy remains the top issue. A new report on electric power consumption last year suggests that it economic growth may be worse that the GDP figures of around 7 percent that the government releases. Manufacturing gained slightly in April but was nowhere near what we have seen in recent years. New economic data show that the economies of Japan, South Korea, Australia and Thailand are not doing well either and are taking measures to stimulate economic growth. Taken together, this suggests that the demand for oil may not increase by as much in the next year as many forecasters are saying.
 
China’s government announced measures last week to improve the job market by demanding the governments at all levels take action to increase entrepreneurship and create more jobs. It has pledged to create 10 million new jobs in 2015.
 
4. Russia/Ukraine
 
Moscow’s oil and condensate production remained at a post-Soviet record of 10.71 million b/d in April.  With global oil prices climbing 21 percent last month to circa $66 a barrel, Moscow is doing better, but revenues are still around 50 percent of what they were last June.  Next month representatives from Russia’s Energy Ministry will meet with officials from OPEC to discuss oil prices. Moscow still would like OPEC to cut production, which climbed in April in hopes that world prices will recover to last year’s levels.
 
Moscow is taking advantage of a recent ruble rally and its slowing inflation to cut interest rates for the third time this year in hopes of stimulating economic growth. The benchmark one-week auction rate was cut from the current 14 percent to 12.5 percent.
 
There has been an increase in the fighting in Ukraine in the last few days, which puts the truce in doubt. The Ukrainians say they are expecting a new separatist offensive in the second half of May.  All this suggests that the EU will renew sanctions on Moscow and that the course of the Ukrainian civil war still has a way to go.
 
5.  The Briefs
 
The UK government told BP that it would oppose any potential foreign takeover of the company because it wants the oil giant to remain a British company with global clout. (4/27)
 
Saudi Arabia’s Supreme Economic Council has approved a restructuring of state oil company Saudi Aramco that includes separating it from the oil ministry.  That said, there are no indications that the move will lead to changes in the fundamental way the world’s top crude exporter makes its oil decisions. (5/2)
 
Saudi Arabia’s state-owned oil company named a new chief executive following a shake-up of the country’s ministerial elite this week. Amin H. Nasser on Friday was promoted to acting president and CEO of Saudi Aramco. He was previously Aramco’s senior vice president for upstream operations. (5/2)
 
In China, accusations by the anti-graft authority against a top executive with major oil company Sinopec are likely to add to what have been several years of uncertainty in China’s oil sector, which has already curtailed spending at home and slowed investment abroad partly as a result of unprecedented government scrutiny. (4/28)
 
A well drilled in Tunisia, currently a minor oil producer, discovered two net oil-bearing reservoirs and flowed at 4,300 barrels of oil per day—a promising test. (5/2)
 
Nigeria’s President-elect, Muhammadu Buhari, has stated that his administration will probe the $20 billion alleged to be missing from the coffers of the Nigeria National Petroleum Corporation, NNPC. (4/27)
 
In Nigeria, the much anticipated report of the forensic audit of the National Petroleum Corporation (NNPC) operations on the missing $20 billion oil money may not amount to much after all, as audit firm PricewaterhouseCoopers Limited has said it cannot vouch for the integrity of its findings because Nigeria’s report was not in accordance with generally accepted standards. (4/29)
 
Ghana has been told by an international tribunal not to begin any new offshore drilling for oil in disputed waters with the Ivory Coast. The International Tribunal for the Law of the Sea did, however, allow Ghana to continue developing current oilfields. (4/29)
 
In Uganda, transport infrastructure remains a challenge as the nation readies itself for oil production. Uganda’s planned 60,000 b/d crude oil refinery will take five years to complete. (5/2)
 
Venezuela’s government, which heavily subsidizes electricity, will start rationing power nationwide as it faces a surge in demand for air conditioning amid a continuing heat wave. (4/29)
 
In Mexico, it has been eight months since national oil firm Petróleos Mexicanos applied for a permit to buy US light oil in a swap for Mexico’s heavier blend, but the company says it is confident it will get U.S. Commerce Department approval and isn’t looking to alternative sellers. (4/28)
 
US oil exports? A coalition of US refineries said repealing a 40-year-old ban on crude oil exports will harm energy security and boost prices at a time when oil markets are in flux. (5/1)
 
The US oilrig count fell by 24 to 679 in the latest week, according to Baker Hughes. There are now 58 percent fewer rigs drilling for oil compared with a peak of 1,609 in October, and Friday’s report marks the 21st straight week of declines, boosting expectations US crude oil production is near a peak. During the week, gas rigs also declined by two to 222.  The total rig count, including 4 “unclassified,” is now 905.  (5/2)
 
The demand for offshore rigs should remain low for the rest of the year with few signs of recovery in the current oil prices, US rig company Hercules Offshore said. (4/30)
 
Offshore drillers are bracing for a wave of contract cancellations as energy companies try to cut their costs to cope with low oil prices. Big oil and gas companies lease drilling rigs and crews from oil-field-services companies, often for years at a time and at a cost of up to $400,000 a day. (4/29)
 
Texas super pipeline: Oil customers in the US market will have links to most Texas refineries and ports once a string of new pipelines come online. Midstream company Enterprise Products Partners announced it had the long-term agreements in place to support the development of a 416-mile 540,000 b/d pipeline to send crude oil and condensate from its terminal in Midland, Texas, to a storage facility in Sealy, west of Houston. (5/2)
 
Debate in North Dakota’s House over the proposal to cut the state’s oil tax rate from 11.5 percent to 10 percent was fierce and ended in a 66-26 vote in favor of the rate cut. The vote removes uncertainty about an oil price threshold that might or might not have eventually lead to a tax cut for oil producers. (5/2)
 
Royal Dutch Shell said Thursday it had reduced its expected 2015 capital expenditure to $33 billion from previous guidance of a little more than $35 billion as the company continues to adjust its business to the lower oil-price environment. (5/1)
 
Exxon Mobil Corp’s first-quarter profit dropped less than expected in results posted on Thursday as margins at the refining unit of the world’s largest publicly traded oil company surged on tumbling crude prices. (5/1)
 
Refining’s reprieve: The world’s top oil companies can expect only limited solace from refining for the rest of the year, even as the often-troubled segment proved valuable in the face of sinking oil prices. Combined profits for the oil majors from refining and trading represented 60 percent of total earnings in the first quarter of 2015, compared with 18 percent last year. In contrast, companies without refining divisions felt the brunt of the oil price collapse; however, by the fourth quarter refining should again be a drag. Any increase in crude prices will further weaken refining margins. (5/2)
 
BP’s replacement-cost profit—a number similar to the net income that US oil companies report—was $2.1 billion, down from $3.48 billion a year earlier. Revenue fell to $54.9 billion from $75.1 billion from a year earlier. Production for the quarter was 8.3% higher than the first quarter of 2014 at 2.31 billion barrels of oil equivalent a day. (4/28)
 
Hess Corp. reported a net loss of $389 million during the first quarter compared with net income of $386 million in first-quarter 2014. Hess is further reducing its capital and exploratory expenditures by $300 million to $4.4 billion this year. (4/30)
 
Chesapeake Energy Corp. has agreed to pay $25 million to settle antitrust allegations made by Michigan’s attorney general as well as complaints that it misled hundreds of landowners to obtain leases in the state. (4/27)
 
US transportation regulators issued tough new rules for railroads hauling crude oil and ethanol that will require trains be equipped with expensive new brake systems. Trains carrying large amounts of crude oil will be restricted to 30 mile an hour speeds if they don’t have new electronic brakes installed by 2021. (5/2)
 
Railcar demand:  Declining output from shale-oil fields cut demand for key types of railroad cars, new data shows, the latest sign of the fallout from lower oil prices. Buyers ordered 4,470 new railway tank cars during the quarter ended March 31, down 6% from a year earlier and about 70% from the 14,964 tank cars ordered during the fourth quarter. (4/27)
 
US coal stockpiles totaled an estimated 165.6 million tons for the week ended April 30, up 29.2% from a year ago, Bentek Energy said Friday. (5/2)
 
EIA expects the United States to be a net natural gas exporter by 2017. After 2017, natural gas trade is driven largely by the availability of natural gas resources and by world energy prices. (4/29)
 
LNG plant construction: FLNG Liquefaction 3, a unit of Freeport LNG Expansion, has closed on the $4.56 billion in financing needed to start construction of the third train of FLNG’s gas liquefaction and LNG loading facility on Quintana Island near Freeport, Tex. The construction cost for the combined three-train project is expected to be $12.5 billion, including owner’s costs and interest during construction. Full three-train operation is expected by third-quarter 2019. LNG production from the first liquefaction train is expected in early 2018. (4/29)
 
Floating regasification is a flexible, cost-effective way to receive and process shipments of liquefied natural gas (LNG). It is increasingly being used to meet natural gas demand in smaller markets, or as a temporary solution until onshore regasification facilities are built. Of four countries planning to begin importing LNG in 2015, three of them—Pakistan, Jordan, and Egypt—have chosen to do so using floating regasification rather than building full-scale onshore regasification facilities. (4/28)
 
Japan anticipates that by 2030 clean energy such as solar and hydro will generate slightly more of the nation’s electricity (24%) than nuclear power plants (22%). (4/29)
 
French daily Le Monde reported recently that an official study for a conference to be held last week was being held back. The energy experts investigated a 100 percent renewable supply of electricity by 2050. The study indicated that France has the potential for 100% renewable electricity – but the subject is too touchy for the country’s political leaders, according to an unofficial summary. (5/1)
 
Tesla’s CEO Elon Musk unveiled a line of home and industrial battery packs late Thursday, representing a strategic shift as his money-losing electric car company tries to break into a crowded energy storage market. (5/1)
 
Greece is five years into the biggest bailout of a debtor in history, closer to the brink than ever, with time running out to avert a bankruptcy that could destabilize not only the eurozone, but the global economy as well. Although Greece has come close to financial meltdown before, the ideological divide has never been deeper. (5/2)
 
Holy climate change! Pope Francis summoned scientists, government officials and religious leaders to a villa in the manicured Vatican Gardens on Tuesday as he stepped into the heated climate-change debate. (4/29)
 
Emissions target: California Gov. Brown ordered new standards for greenhouse gas emission reductions over the next 15 years in California, building on the state’s already stringent requirements. Mr. Brown ordered a reduction in greenhouse gas emissions to 40 percent below 1990 levels by 2030. The targets align the nation’s largest state with the standards set by the European Union. (4/30)
 
Power drought: The lack of water has put a serious crimp in hydroelectric power production at Hoover Dam and other power plants across the West, limiting an inexpensive and pollution-free energy source that once was considered endless. Power capacity at Hoover Dam, on the Arizona-Nevada border, has dropped nearly 25 percent since 2000. (4/27)
 
The migrant crisis in the Mediterranean is symptomatic of deep dislocation in the Sahel region and sub-Saharan Africa — dislocation exacerbated by climate change. Over the long term, changing temperatures and rainfall can undermine the rural livelihoods of farming, herding and fishing. (4/27)