Peak Oil Review - Aug 4

1. Oil and the Global Economy

Oil prices, which have been falling since mid-June, dropped still further last week leaving New York futures at $97.88 and London at $104.84. During the six-week price slump, NY futures fell 6.8 percent and London fell 5.6 percent. Traders continue to ignore the ever-growing chaos in the Middle East and the sanctions being imposed on Russia’s oil industry on the grounds that as yet there has been no significant reduction in global oil supplies. Instead, the markets are reacting to fundamentals such as falling demand for gasoline, inventories, and prospects for economic growth. The “risk premium” has been wrung out of the oil markets in the last few weeks – perhaps prematurely.

The high level of refinery utilization we have seen this summer has resulted in an increase in gasoline inventories as demand for gasoline in the US has been weak even at the height of the summer driving season. Refinery operations will be slowing soon as we enter the fall maintenance season and the switchover to winter fuel production. New pipelines are expected to open in the next two months that will bring an increased flow of Canadian oil through to the US Gulf coast.

The US remains the critical source of new oil production that is keeping world output stable and a lid on prices. Although it will likely be another few years before US production starts to fall, there are already signs that this could happen sooner than most believe. Growth in North Dakota shale oil production is mostly taking place in one county now, discrepancies are developing in just how much oil and condensates are being produced in Texas, and a new federal report shows that the production of oil from the Gulf of Mexico is down by 140 million barrels per year since 2010. The EIA says that US production slipped by 122,000 b/d the week before last. For now this is probably an aberration, but someday in the next four or five years, production is likely to start falling.

US natural gas futures continued to trade around $3.80 per million last week. Prices rose a touch Thursday on weather forecasts that temperatures will be closer to normal later in August, but rebounded Friday on reports of increasing natural gas production and substantial injections in storage.

2. The Middle East & North Africa

Gaza: Despite the tenuous relationship of the Gaza situation to oil exports, the passions being aroused by the fighting could easily lead to more serious confrontations affecting oil supplies. This time around, the politicization of Islam has resulted in tacit support for Israel by Egypt, Jordan, and the Gulf oil producers including the Saudis who are concerned that Islamist movements threaten their hold on power. Last week saw new threats from Iran to increase rocket supplies to Palestinian entities surrounding Israel. Iran’s Ayatollah called on all Muslims everywhere to join in an attack on the Israelis. The new “Islamic State” which is rampaging across Syria and Iraq joined in saying that it will soon be in a position to join in the attack on Israel.

There are many possible outcomes to this situation that could affect oil supplies ranging from a direct Israeli confrontation with Iran, to blockage of the Suez to canal, to Israeli incursions into Lebanon or Syria. So long as the Gulf Arabs see Israel as the lesser of two evils we are unlikely to see boycotts of oil exports; however, as this situation drags on and the casualty list grows anything could happen.

Iraq: It has been a unusually quiet week in Iraq with little more than the usual bombings taking place. The UN reported that 1,700 people were killed by bombs and fighting in Iraq during July. No progress on forming a new government has been reported. The Islamic State (IS) has been distracted by the heavy fighting in Syria which has resulted in some of the heaviest casualties of the civil war; however it managed to capture several more towns in northern Iraq, a couple of small oil fields and drive back Kurdish forces from positions in Iraq proper. The IS has captured considerable military equipment in Iraq and may be moving much of this into Syria where the Assad government is perceived as a softer target than Baghdad. In the meantime, the Islamic State is carrying out brutal repressions in places it has occupied.

Most of this week’s news focused on a tanker full of Kurdish oil that is anchored off Texas. It seems that the US government has shifted its position and no longer opposes the Kurds selling oil abroad that nominally belongs to the Iraqi government. Baghdad’s US lawyers, however, got a US federal court order to seize the oil, which was still 60 miles offshore and beyond the court’s jurisdiction. The shift in Washington’s position on Kurdish oil sales suggest that the Obama administration is either trying to pressure the Iraqis to get their act together to confront the IS or is looking ahead to better relations with an independent Kurdistan.

Libya: It was a bad week for the country and the world’s oil supply. Heavy fighting between militia groups continued in downtown Tripoli, at the Tripoli airport — starting a major fire at airport’s fuel tank farm — and in Benghazi where the Islamist militias overran a local army base and declared the establishment of a caliphate. Led by the US embassy, most major countries closed their embassies in Tripoli and made for the safety of the Tunisian border. Tunisia was forced to temporarily close its border with Libya after thousands of refugees from the fighting, mostly Egyptian, tried to storm into Tunisia without proper documentation.

Libya is close to collapse. Most medical personnel in the country are foreigners who are leaving. The major oil companies are pulling out their foreign personnel as there is little air travel left and it is too dangerous to drive to the oilfields. Despite government announcements that major Libyan oil fields and export terminals are back in business, little or no oil is being exported. Foreign oil buyers do not want to commit to large purchases when delivery is so uncertain. Partition of the country looks more likely all the time, but sorting out who gets what oil is likely to take some time. It seems doubtful that substantial amounts of oil will be exported from Libya in the near future.

Iran: With nuclear talks extended to November, and most of the sanctions remaining in place until then, there has been little news recently. The Israeli invasion of Gaza, however, has opened new opportunities for Iranian involvement in regional affairs that could lead to trouble in the future. Two years ago Hamas refused to get involved in Syrian insurgency on behalf the Assad government and and instead supported the Sunni insurgents. This resulted in Hamas moving its headquarters out of Damascus and losing Iran’s political support. Now, the open warfare between Hamas and Israel has given Tehran a chance to make common cause with some Sunnis against Israel and perhaps temper the Islamic States gains against Shi’ism in the region.

To further this aim, Tehran is calling on all Muslims to join in a crusade against Israel and is threatening to supply more arms to be used against the Israelis. Tehran’s resources, however, are wearing thin as it tries to shore up the Assad government in Syria, the Maliki government in Iraq, Hezbollah in Lebanon, and now Hamas in Gaza. At the same time, it is busy confronting the US and EU over its nuclear policies and is burdened with heavy sanctions and much reduced income from oil exports. This is all becoming a complex and dangerous for a region that is already beset with numerous troubles. Oil market traders may be right in asserting that there is nothing on the immediate horizon to lower Middle Eastern oil exports, but forces are coalescing which could lead to serious troubles ahead.

3. Russia

Moscow has itself in a predicament. Last week the US and EU imposed significantly tougher sanctions on the Russians in retaliation for Moscow’s continuing efforts to destabilize Ukraine and its lack of candor about its involvement in the shoot down of the Malaysian airliner. The new sanctions are aimed at imposing long term economic hardships on Moscow by denying the capital and technical support it needs to maintain oil production by drilling for oil in adverse conditions such as the Arctic. It is generally agreed that Russia’s conventional oil production has plateaued and may have even started down so that in a few years its major source of revenue may start to decline. To reverse this decline Moscow is counting on non-conventional oils such as from the Arctic or shale beds where the West has a considerable lead in experience and technology.

As the new sanctions are being imposed, Ukrainian forces are moving against the last major rebel stronghold in eastern Ukraine – Donetsk. To counter this assault Moscow has undertaken a major buildup in military equipment along its border with Ukraine and may even have some of its forces operating in Ukraine in addition to supplying equipment to dissidents. Should Russian forces become directly involved with the fighting in the next few days or weeks, the confrontation with the US and EU would be at a new level. As war between nuclear armed powers in unthinkable, more sanctions which could target Moscow’s oil and gas exports are a possibility. This situation continues to be fraught with more dangers and risks than complacent oil traders seem to imagine. The EU which has a much broader range of economic relationships with Moscow has some hard decisions to make in the days ahead.

4. Quote of the Week

“While Europe is eager to diversify an energy sector dependent on Russia, Algeria may not be a good backstop. Algeria’s sharp rise in domestic energy consumption and concurrent decline in gas production suggests that Algeria will fall short of this role."

— Mansouria Mokhefi, special adviser for the Middle East and North Africa, French Institute of International Relations

5. The Briefs

Algeria’s role as a key supplier of natural gas to Europe should be reviewed given production declines, the European Council on Foreign Relations said Tuesday. The European Union spends an average $1 billion per day on energy imports. More than 60 percent of the region’s gas supplies come from foreign suppliers, notably Russia, Norway and Algeria respectively. Algeria has the tenth-largest natural gas deposits in the world. Its exports have been in decline, however, because of lagging foreign investments. (7/30)
Nigeria LNG Ltd said it was gradually losing global LNG market share due to a delay in the expansion of the six train Bonny LNG plant in the Niger Delta. The Bonny plant produces 22 million mt per year, but plans to build a seventh train and increase output to 30 million by2010, have failed to materialize. (7/30)
Nigeria will be losing over $2 million daily as Italian oil firm Eni shut down its 20,000 barrels per day crude oil pipeline due to sabotage. (7/31)
In Yemen, insurgents blew up the main oil export pipeline on Wednesday. Yemen’s oil and gas pipelines have repeatedly been sabotaged since anti-government protests led to a power vacuum in 2011, causing fuel shortages and a drop in export earnings. Sanaa earned just $671 million from exporting crude oil in January-May, down nearly 40 percent from a year earlier, as a result of the frequent bombings. The Marib pipeline carries around 70,000-110,000 barrels per day of Marib light crude. It was last repaired on July 24 after it was blown up on July 12. (7/31)
BP and Russia: BP warned that further international sanctions on Russia could hurt its profits because of its stake in the country’s oil giant, Rosneft. The company said any erosion of its relationship with Rosneft – which is majority controlled by the Russian state, with BP holding a 19.75 percent stake – could also adversely impact its reputation. The US has already put sanctions on Rosneft’s president and prohibited the company from tapping US markets to raise money. (7/29)
Ruling against Russia: The Hague’s arbitration court has ruled in favor of a group of shareholders in defunct oil giant Yukos against Russia, awarding compensation of around $50 billion. (7/29)
Russian energy company Rosneft said Friday it closed on a deal to acquire Venezuelan and Russian assets from oil services company Weatherford International. Under the terms of the deal, Rosneft acquires 8 companies that are part of Weatherford group conducting drilling operations in Russia and Venezuela. (8/2)
In Venezuela, Rosneft and Petroleos de Venezuela have signed a cooperation agreement for offshore projects in the Rio-Caribe and Mejillones blocks, the second stage of the Mariscal Sucre gas project. (7/31)
Venezuela, strapped for cash, is considering a deal for its US-based refiner Citgo as well as a stake in a refinery run with Exxon Mobil Corp. Citgo operates three refineries. (7/31)
Ireland finally found treasure at the end of the rainbow, or so it seemed in 2012. After drilling in the North Celtic Sea Basin, about 40 miles off the Cork coast, Providence Resources said its Barryroe oil field may hold as many as 1.6 billion barrels. The company’s shares surged, and the government hailed the “significant” test of oil flows off Ireland just as the nation’s debt-ravaged finances cried out for a boost. Two years later, Providence still hasn’t found a partner to develop Barryroe, production has been delayed and the company’s share price has dropped 84 percent. (7/30)
New Zealand is experiencing a petroleum exploration boom today that is part of a broader shift: After decades of focusing on less-developed nations, big companies are tilting toward wealthy countries when hunting for oil and gas. Such places have higher costs and tighter regulations, but their political stability is far better. (7/28)
In China, a government anticorruption investigation that already has caught dozens of officials is now stretching into Canada. A shake-up has hit state-run China National Petroleum Corp.’s Canadian operations and a billion-dollar oil-sands project is now in limbo. (7/29)
Cash flow problems: In line with the lowest price volatility in years and stable crude oil prices, cash flow from operations for major energy companies has flattened. Data compiled from quarterly reports suggest that, for the year ending Mar. 31, cash from operations for 127 major oil and gas companies totaled $568 billion, and major uses of cash totaled $677 billion, generating a gap of almost $110 billion. To fill the shortfall and increase the overall cash balance, major energy companies have increased net debt by $106 billion and sold off $76 billion worth of assets.
Oil bull: Tudor Pickering expects another 4.8 million b/d of US output growth during the rest of the decade, putting the figure at 12.3M in 2020 and far above the EIA forecast of 9.1Mbd of continental US production by then. The investment bank sees the Permian Basin in Texas accounting for 40% of the growth, with the Bakken and Eagle Ford shales cumulatively making up 41%. Most of the increased output will be light and sweet, says Tudor Pickering, and pressure will grow to allow oil exports–though it doesn’t see that happening until after 2016.
US oil exports: a tanker of oil from Texas set sail Wednesday for South Korea, the first unrestricted sale of unrefined American oil since the 1970s. How that $40 million shipment avoided the nearly four-decade ban on exporting U.S. crude is a tale involving two determined energy companies, loophole-seeking lawyers, and an unprecedented boom in American drilling that could create a glut of ultralight oil. (7/31)
Enhanced Oil Recovery (EOR): The injection of miscible (capable of being mixed) CO₂ into old oil fields to recover more of the oil-in-place is an expensive undertaking. The cost of the CO₂ itself can add $20 to $30 per barrel of oil produced. In addition, the producer must pay for surface facilities to separate the CO₂ from the production stream and compress it back into the oil reservoir. The producer also incurs a financial cost for the time delay associated with repressurizing old reservoirs. Oil prices thus play an important role in determining whether the additional production resulting from applying CO₂EOR to old fields is sufficient to make this process commercially and economically feasible. (7/31; NOTE–CO2 injection currently produces roughly 280,000 b/day in the US, according to the EIA.)
Cutbacks: CGG SA, a seismic surveyor of oilfields, will cut jobs and accelerate reductions in its fleet of vessels after delayed orders led to a second-quarter loss. CGG will shrink its fleet to 13 vessels from 18 by the end of the year and cut about 10 percent of its workforce, or more than 1,000 jobs worldwide. Sites in Norway, Nigeria and Venezuela will be closed. (8/1)
Fracking and politics: The spacing between oil and gas wells and residential homes has been an issue in several states as fracking becomes more widespread and moves closer to existing neighborhoods. Wyoming is the latest state to take up the issue. The current spacing in Wyoming between homes and oil wells is 350 feet, compared to 500 feet in North Dakota and Colorado, while Texas leaves it up to municipalities to decide the distance. Fort Worth requires a spacing of 600 feet, while in Dallas the distance is 1,500 feet. (8/1)
Fracking and politics: Coloradans are poised to vote on multiple ballot measures related to fracking and other forms of energy development this fall, setting up a bitter and expensive fight. Two measures supported by environmental groups would require new oil and gas wells to be drilled at least 2,000 feet from homes and schools, and give local governments more power to regulate energy projects. A third initiative supported by the oil-and-gas industry would bar communities that prohibit energy development from receiving industry revenue administered by the state. (8/2)
The US government said it was calling for information about the oil and natural gas resource potential in the Beaufort Sea off the northern coast of Alaska. The Bureau of Ocean Energy Management said it wanted to find out more about the oil and gas that could lie in the area as it plans a possible lease sale for 2017. (7/29)
Utah tar sands: The Uintah County sheriff’s department arrested 21 protesters at the site of the first tar sands mining operation in the US. US Oil Sands estimates it will produce 184 million barrels of bitumen from its Utah mine once operations begin. The state is currently investigating whether Vernal, the biggest town in the Uintah basin, is currently experiencing a spike in infant deaths. The group Utah Physicians for a Healthy Environment believes the infant deaths are linked to the increase in toxic emissions from the oil and gas operations. (7/29)
LNG exports: Freeport LNG Development has a proposed facility along the Texas coast that has been cleared for exports of liquefied natural gas sourced from domestic supplies. The plant will be capable of processing 1.8 billion cubic feet of natural gas per day for exports. (8/2)
Japan spent 57 percent more on fossil fuels in the year ended March 31 compared with the year ended March 2011, when the Fukushima nuclear accident occurred. Traditional fossil fuels now account for about 88 percent of Japan’s power output, up from about 60 percent before Fukushima. However, the first two nuclear power plants have been cleared to restart operations by late fall, and a total of four plants could be operating by year’s end. (7/29)
In China, the performance of decision-makers will be partially evaluated by their environmental stewardship. A briefing issued by the Communist Party of China said the decisions and administrative activities of Chinese officials will be measured against social, economic and environmental impacts. (7/29)
US exporting CO2: As the US tries to set a global example by reducing demand for fossil fuels at home, American energy companies are sending more dirty fuels than ever to other parts of the world every year. These exports are ending up in places with more lax environmental standards, or where governments are resistant to tackling the emissions responsible for global warming. It’s a global shell game because it shifts some of the pollution – and the burden for cleaning it up – onto another country’s balance sheet. (5/28)
The impacts of peak oil on non-transportation industries are not to be underestimated. Industrialized agriculture is a massive consumer of oil for irrigation, motorized transport, and fertilizer. Three to four percent of global oil production goes into plastics manufacturing. Ten percent of crude oil is refined to provide raw materials for the chemical industries. The use of crude oil as a feedstock for pharmaceuticals makes companies major oil consumers, and the healthcare industry is doubly at risk, given its massive use of plastics for packaging, surgical materials and other uses. (7/28)