1. Oil and the Global Economy
Newsflash: oil markets were volatile again last week. On the New York Mercantile Exchange, prices started at $92.70, dipped as low as $90 before closing up strongly to settle at $95.61. That was the top closing price in a month, though still off from the year’s high of roughly $100. On the London futures market, Brent crude ended the week at $104, also up modestly for the week.
Both the Dow Jones Industrials and the S and P 500 indexes hit new all-time highs after the Labor Department reported late last week that nonfarm payrolls grew by 165,000 in April—more than economists expected. The housing market also showed positive signs. Conventional wisdom says that, in the short term, oil markets are likely to follow economic perceptions and equity markets until some key fundamentals on the supply-side change.
Those fundamentals were all over the map though mostly bearish. Crude inventories gained 6.7 million barrels to 395.3 million, the highest level in the three-plus decades since records have been kept. Total oil demand in the U.S. fell by 3.6% to 17.9 barrels/day last week, according to the Energy Information Administration.
While the broadest labor market number—unemployment dipping to 7.5%, a four-year low—was clearly positive, analysts warn that the road to recovery remains bumpy. Most recent employment gains were in service and health care sectors, with no notable gains from better-paying manufacturing and construction jobs. The length of the workweek dipped slightly to 34.4 hrs and the number of part-time workers wanting full-time work increased by 278,000, both signs of weakness. Furthermore, cuts of government workers furloughed by the sequester are just now starting to hit the US economy. Equity and oil markets remain vulnerable these factors plus to budget debates in Washington and recessionary news from Europe.
After the announcement last Thursday that natural gas inventories rose more than expected, prices dropped 7% or 30 cents, the largest NYMEX futures loss in two years, settling flat Friday at $4.05. Utilities continued their recent modest shift from natural gas to coal for power generation, with year-to-date coal generation up 13% and natural gas generation down 11%. Yet Goldman Sachs still expects prices to average $4.50 in the second half of the year, given lower than average amounts of gas in storage. ESA Inc. says gas prices in the Northeast this summer may average $5 to $5.50 due to increasing demand from power plants and limited pipeline capacity.
2. The Middle East and Africa
Iraq: On a positive note, Baghdad and the Kurds announced agreement on a provisional, seven-point plan that would lead to resumption of Kurdish oil exports to the south—suspended late last year—thereby increasing Iraq’s overall imports. If the agreement receives final approval, the long-stalled federal hydrocarbon law would be revisited, funds owed the Kurds for oil exports would be paid and the two-month boycott of parliament by Kurdish deputies would end. Reports suggest Iraq exported 2.62 million b/day last month, up by roughly 200,000 b/day to reach the highest level since last November. Also on the upside, Iraq inaugurated a $13+ billion natural gas project in Basra run by Royal Dutch Shell. The system will collect, process and deliver natural gas formerly flared from major oil fields and use it to fire desperately needed power generation.
On a more cautionary note, the central government is trimming its wildly unrealistic oil production schedule. Back in 2009, the announcement that Iraq intended to shoot for 12 million barrels a day by 2017, becoming the world’s largest oil producer, was greeted with guffaws and widespread skepticism. Now that we’re half-way there and production has increased 50% to roughly 3 million b/day, the government has scaled back its target to 8 or 9 million barrels/day during the 2017-2020 time frame. No small part of the downturn is due to fading interest from oil majors, thanks to endless political turmoil, worsening sectarian bloodshed, poor contractual terms, widespread corruption, and infrastructure bottlenecks. The revised target still appears highly unrealistic.
Iran: The nation’s exports last year fell to a 26-year low of 1.5 million b/day, down 40% from 2011, according to estimates by the US Dept. of Energy. Revenues also dropped, from an estimated $95 billion in 2011 to $69 billion last year, though 2012’s higher market prices softened that blow. While some of Iran’s drop stems from older fields maturing, most of the decline ties back to tightened economic sanctions. And the new set of sanctions that started last month should further cut into exports that shipped last year to Japan, India and South Korea. This bind may in part account for the dozen large oil tankers loaded and anchored in floating storage for 28 days or more off Iran’s coast.
Syria: Two new developments last week have the potential to impact Syria’s ongoing civil war in unforeseeable ways. First, new accusations surfaced regarding use of chemical weapons by the government against rebel forces. If substantiated, this would dramatically increase pressure for a military response by the US; the most recent reports, however, indicate that western investigators lack confirming evidence regarding the accusation, including which side might have used the chemical weapons. Second, two Israeli airstrikes on targets in Syria–including one on a military base in the Damascus area—raised concerns about an expanded conflict. The Arab League Secretary General plus foreign ministers in Egypt and Iran were quick to condemn the attacks.
Saudi Arabia: Oil minister Ali Al-Naimi delivered some intriguing remarks last Tuesday at the Center for Strategic and International Studies in Washington. While lauding the US oil industry’s innovative recovery through its rapid ramp-up of shale oil production, he stated it would be unrealistic to believe that shale oil plays would eliminate oil imports. "Talk of US energy independence disregards inter-linked markets. Just as I didn’t accept the peak oil argument years ago, I reject the US energy independence idea now… This talk of ending US reliance on imports is naïve and simplistic.”
As a very experienced petroleum geologist used to warn, “When you are evaluating statements from other oil men, first figure out whether they are buying or selling.” In this case, it was important for the Kingdom’s oil minister to stand up for their long-term interests (selling). But twice in the previous decade, the Saudis warned the US about misguided long-term views. The first was during 2004 when, often behind closed doors, they disabused the US EIA of its fantasy-like forecast that Saudi Arabia would be supplying 22 million barrels of oil by 2025; the EIA backed off. Second, during 2008 the Saudi king said simply that he had told his oil professionals “we must save some [oil] for the grandchildren.” Ever since, while the Saudis often imply they will expand production as needed to keep markets stable, their public statements sound more cautious. Another remark last Tuesday from Naimi is the latest such informative statement: "We’ll be lucky to go past 9 million b/d by 2020. We’re pleased to see production coming from so many other suppliers, and see no need to go beyond our 12.5 million b/d capacity." That will likely be Aramco’s long-term supply ceiling.
Libya: The nation’s oil industry has restored oil production to levels approaching those achieved before the overthrow of its former president, but recurring violence is a major and growing concern to both the citizenry as well as oil and natural gas importing clients. With their current weak government, the proliferation of armed militias poses an increasing threat to the working environment for employees of international oil companies operating in the region. A pair of prolonged firefights by militias last month killed one and wounded several but worried the broader populace. While the government has an 18,000-man forced dedicated to protect petroleum operations, the militias still manage to threaten oilfields, and protests at export terminals are hampering operations. The total revenue lost last month: $1 billion, from reduced sales.
East Africa: Mozambique, Tanzania, Uganda and Kenya should become significant oil and gas producers later during this decade. After two years of exploration, roughly 80 Tcf of natural gas have been found Mozambique and 20 Tcf in Tanzania; 3.5 billion barrels of oil were proven up in Uganda’s Lake Albert region back in 2006; and hopes persist that Kenya’s Great Rift Valley could contain up to 10 billion barrels of oil. Last week, Britain’s BG Group announced new gas finds in the waters off Tanzania near the Mozambique water. Statoil and BG Group are among the companies currently looking for sites for possible LNG terminals that would serve Asian markets.
3. New USGS forecasts for Bakken
Last week the US Geological Survey released updated oil and gas resource assessments for the two key producing shale oil formations—the Bakken and the Three Forks—in North Dakota, Montana and South Dakota. The formations hold an estimated mean of 7.4 billion barrels of undiscovered, technically recoverable oil, split evenly between the two. That’s a significant increase, roughly doubling the USGS’s previous mean estimate of 3.65 billion back in 2008.
Since the previous assessment, thousands of wells have been drilled in the two formations and some 450 million barrels of oil have been extracted. Key information from those wells helped the USGS refine their estimate. The bottom line from this latest data analysis: the resource potential of the two formations is much larger than the USGS previously estimated.
4. Quote of the Week
“The people who were talking about peak oil 20 years ago are eating their words.”
– Fadel Gheit, senior oil-and-gas analyst at Oppenheimer and Co (Peak Oil News 5/1 item #6)
“[There] is a huge surge in commentary… lauding the boom in ‘unconventional’ oil finds as completely debunking the fashionable "peak oil" concerns of the mid-aughts.…[W]e’re in nothing like the peak oil nightmare that a naive forward projection of the 2003-08 hockey stick would have led you to expect. But we’ve hardly conquered oil scarcity either. New discoveries are having trouble keeping pace with rising car ownership in Asia and declining production from many established oil sources.” – Matthew Yglesias, Slate (Peak Oil News 5/1 #12)
- Russia, the world’s biggest oil producer, boosted crude and condensate production 1.5% in April from a year earlier to 10.47 million barrels/d, near the post-Soviet era record. (5/3 #17)
- Cash-strapped Japanese power utilities, which in the past week reported $13.34 billion in annual pretax losses, will likely face the added burden of shutting down aging nuclear-power plants. A new set of safety requirements is expected to shut down at least 10 of the country’s 50 licensed reactors. (5/3 #5)
- Venezuela’s state oil company PdVSA said Friday its oil and liquefied natural gas output fell 3% in 2012 compared with a year earlier, while exports rose slightly. (5/3 #4)
- In Venezuela, Chavez’s heir, Nicolas Maduro, appears to have done little to address declining production, billions in debt, or infrastructure deficiencies that have caused major accidents. National oil company PDVSA no longer generates enough income to cover all its costs. The oil minister said that a rise in daily domestic oil consumption to 650,000 barrels this year is expected to drive down exports by 7.8 percent to 2.36 million barrels a day, inevitably damaging revenues for PDSVA and the broader Venezuelan budget. (5/4 #5)
- OPEC remains relatively complacent that North American production gains will continue to meet global demand, and that OPEC (largely Saudi Aramco) can back away from full production in order to balance supply and demand at a price level that keeps the OPEC bankers happy. Aramco will likely not boost their crude oil production above 10 million b/d, despite the wishes and projections of others that they will do so. (4/30 #14)
- U.S. crude imports by tanker have fallen about 13 percent this year. (5/3 #3)
- Egypt is working to secure oil supply deals on favorable credit terms from major Arab producers in an attempt to ease fuel shortages and a government cash crunch that have proved damaging for the country’s Islamist president, Mohammed Morsi. (4/29 #4)
- Israel: Israeli company Energy Initiatives hopes to start a pilot project soon to tap into a large oil shale resource discovered in 2009. They talk of reaching production of 50,000 to 100,000 barrels a day of production within a decade. (5/1 #6) [Editor’s note: They plan to use technology similar to Shell’s approach, developed over the course of decades; that technology still hasn’t produced economical oil in the USA where it was developed.]
- In Norway, an oil and gas leak at BP’s Ula field could have caused a deadly explosion, regulators said. They ordered the company to review maintenance procedures after discovering "serious breaches." (4/29 #15)
- China: While the US EIA reports that China may hold twice as much shale gas as the US, so far—after 60 exploration wells drilled over the last two years—there has been no Chinese shale gas production. (5/1 #7)
- China emerged as the top performer globally in domestic passenger air traffic in March with a 16% year on year rise, propelled by strong economic growth. (5/4 #7)
- China’s growth in oil consumption has been stable in a band between 6% and 8% for several decades, with 7.2% being the figure for the latest decade available. Going forward, that’s another 15mbd in the next thirteen years or so. Just for China. If you compare this to things like the extra 4 million b/d you might hope for from tar sands in this time frame, or the 2 mbd that global crude supply has increased since 2005, you can see that this is going to stress the global oil system a lot. (4/29 #8)
- World oil supply and demand: Given China’s rate of rocketing demand, something has to give. Either oil supply has to grow a lot faster than it has in the last eight years, or the OECD has to go on a crash conservation program, or developing regions, especially China, have to grow their consumption much more slowly than they did in the last decade (despite the oil shock and financial crisis). Or some combination of all three. (5/1 #13)
- Excluding the US, rest-of-world crude oil production in the 2nd half of 2012 was on the same level as in the 2nd half of 2005, despite 85% higher oil prices. (4/30 #13)
- Rig count: The US natural gas rig count fell 12 to 354 rigs, a nearly 18-year low Friday, said as Baker Hughes. But with oil rigs up by 22, the overall rig count rose to 1,764 from the previous week, which is still down by 201 rigs over last year at this time. (5/3 #13)
- In Alaska, oil production from the North Slope declined nearly 6 percent last month to around 546,000 barrels/day. Alaska’s oiil production is now down roughly ¾ from its peak more than 20 years ago at just over 2 million barrels/day. (5/3 #6)
- In Alberta, Exxon Mobil said it has started production from the Kearl oil sands project. Kearl is estimated to reach is full design capacity of 345,000 barrels of oil per day by 2020. (4/29 #12)
- Texas: The chairman of the Texas Railroad Commission has said that oil production in Texas could roughly double by 2020. Much of that could come from lesser-known shale oil formations in early stages of development such as the Cline and the Tuscaloosa Marine shales. (4/30 #12)
- Off Virginia’s coastline, potential oil and natural gas reserves must be included in a comprehensive energy plan, the oil industry said. U.S. Rep. Scott Rigell, R-Va., introduced a bill last week that would open areas off the Virginia coast to energy explorers. (4/29 #11)
- Technology created an energy revolution over the past decade – just not the one we expected. Fossil fuels? They were going to be expensive and scarce, relics of an earlier, dirtier age. But in the race to conquer energy technology, Old Energy is winning. [5/3 #2]
- President Obama is being pressed by opponents of the Keystone XL pipeline to tie any approval to measures that would curb climate change, reflecting mounting pressure on the administration to mitigate the $5.3 billion project’s impact if it goes forward. (5/3 #9)
- Keystone XL: Since TransCanada is awaiting U.S. approval for its cross-border Keystone pipeline, they announced a one-year delay in the pipeline’s expected in-service date, pushing it back to late 2015. TransCanada already has $1.8 billion in the project. (4/29 #13)
- Pipeline company Enbridge said that by 2015 it plans to increase the oil carrying capacity of its Alberta Clipper pipeline that runs from Alberta province to Wisconsin, from 400,000 to 880,000 b/day. That is more than would be shipped through the Keystone XL line. (5/4 #11). Enbridge’s request for a permit has so far escaped controversy. That may change as the State Department begins to review the plan. (5/2 #7)
- Coal plants: the U.S. EPA will soon issue a standard that will effectively bar construction of new coal- fired power plants that lack carbon-capture technology. The rule won’t cover older plants, though that issue may be addressed in subsequent rulings. (5/3 #9)
- Water resources: Rapid expansion of hydraulic fracturing to retrieve once-inaccessible oil and gas could put pressure on already-stressed water resources from the suburbs of Fort Worth to western Colorado, according to a new report from a nonprofit group that advises investors about companies’ environmental risks and significant local effects. (5/2 #8)
- BP has been hit with a flurry of 2,200 lawsuits linked to the 2010 Deepwater Horizon disaster as individuals, companies and government entities scramble to meet a three-year deadline for spill-related claims against the energy group. (4/30 #8)
- U.S. crude oil output surged 15.3% year-on-year in February, exceeding net imports of crude oil for the first time since 1996, according to EIA data. Canada accounted for 38.7% of U.S. total crude imports, the most ever by a single nation. U.S. imports from OPEC by dropped 22.2% in February from a year earlier. (4/29 #2)