1. Oil and the Global Economy
New York oil prices continued to fall last week closing on Friday at $92.72 down from $106 three months ago — the longest losing streak in five years. Increasing US production, tepid domestic demand, and imports of 7.7 million b/d (even though they are at a 13 year low) have resulted in US commercial crude inventories which are approaching the 400 million barrel level, up from 275 million at this time last year. We are currently in the time of year when crude inventories usually build so if trends continue we could see a stockpile of 425 million barrels next spring.
US exports of petroleum products have been unusually strong in recent years. In addition to the excess capacity caused by weak domestic demand, cheap natural gas which is used to fuel their refineries has given US refiners a major advantage in comparison with their foreign competitors. While output from US refineries is running some 5-6 percent above this time last year, much of this is going to export.
With US domestic production climbing from 6.8 million b/d at this time last year to 8 million b/d the week before last, many are expecting this trend to continue with US production rising above 9 million b/d in 2014 and possibly above 10 million by the end of 2015 which would result in major dislocations to the oil markets. US tight oil production has risen faster in the past two years than many observers had expected as producers concentrated their drilling in a limited number of “sweet spots” — where new wells are far more productive than the average for the region. Obviously, these “sweet spots” are relatively small and finite so at some point there will be no more places to drill new wells and depletion will overtake production.
Although independent analysts were saying that production of US tight oil would peak somewhere around 2017, the rapid exploitation of the “sweet spots” could mean the places to drill for tight oil that can be produced economically could run out before then. Overall shale oil production may be profitable, perhaps only marginally, but the day will come when these multi-million dollar wells are not covering the high costs of drilling, fracking, and washing out salt buildup.
In the rest of the world, however, things are not going as well as in he US which is why London prices continue to be strong. After touching a low of $103 in early November, Brent crude climbed steadily last month; traded around $111 for most of last week; and then fell to a Friday close of $109.69 after the European Central Bank cut its financing rate thereby weakening the euro and London oil futures.
A survey taken late last week suggests that OPEC’s November crude production fell to a two year low of just above 30 million b/d, down about 245,000 b/d from October. The troubles in Libya and Iraq are well known, but Nigeria’s production slipped by 100,000 b/d due to unrest in the Niger Delta, and even the Saudis, who pumped a 40-year record 10 million b/d in September, slipped back to an estimated 9.65 million b/d last month.
Despite much talk of increased Iranian exports, the recent agreement will only free up Iran’s finances a little and should still hold a lid on its oil exports. For now the increased US production of tight oil from Texas and North Dakota seems to be balancing off weaker OPEC production resulting in lower oil prices in the US and higher prices for the international markets.
US natural gas prices climbed steadily from $3.50 per million BTUs in early November to $3.95 on Friday due to colder weather in much of the country. These low temperatures are forecast to moderate this week.
2. The Middle East & North Africa
Iran: Most news about Iran last week focused on the long-range implications of a rapprochement between Tehran and the West. A deal that would implicitly recognize Iran’s right to enrich; restore normal trade relations; open Iran to unlimited investment; and allow Tehran to export as much oil as it can has many implications for the future of the Middle East. Some states such as the Saudis are already taking the de-demonizing of the Iranians rather hard. There is talk of more nuclear proliferation in the region even if Iran’s nuclear programs remain under strict IAEA inspection.
The opening of Iran to unlimited western investment would likely speed the development of Iran’s giant Pars natural gas field which could become a major source of gas for the region and Europe. The Pars field could become a major competitor for Israel should it get into the natural gas export business.
Iran’s possible return to exporting more oil has already set off a row within OPEC as to whether other countries should cut production to accommodate Tehran’s return. Some exporters, such as Venezuela, fear that world prices will be driven lower by a comprehensive nuclear agreement. Negotiations over the next stage of the agreement begin this week.
Iraq: Violence is reaching levels not seen in the last six or seven years as the Shiites begin to retaliate for the rain of truck and suicide bombings that Sunni radicals have showered on their markets, cafes, and mosques. Rather than random blowing up of civilians and the occasional security installation, the Shiite terrorists seem to prefer targeted kidnappings and summary executions of prominent Sunnis not surrounded by phalanxes of body guards. On Friday 50 people were taken, some from their homes, by armed men and executed. They join the 6,000 already killed by terrorists in Iraq this year.
Exxon continued its retreat from Iraq proper to Iraqi Kurdistan last week by reducing its stake in the 9 billion barrel West Qurna oilfield from 60 to 25 percent. As could be expected the Chinese were only too happy, to take over a substantial piece of Exxon’s share. The field now produces 500,000 b/d but many believe it has the potential of reaching 3 million, placing it among the world’s largest producing fields. Baghdad had been warning Exxon to choose between West Qurna and doing business with the Kurds, or risk expulsion, but has recently toned down its rhetoric realizing that Exxon’s precipitous departure would only slow plans for increased production.
Iraqi Kurdistan and Turkey signed a multi-billion dollar energy deal last week which has infuriated Baghdad as it claims sole authority to manage oil production from anywhere in Iraq. Neither the Turks nor the Kurds are officially acknowledging the deal in hopes they can get Baghdad to accept the situation, perhaps for a cut of the revenue. Turkey is currently spending $60 billion a year on energy to support its growing economy and Ankara hopes that the Kurdish deal will enable it to reduce its heavy dependence on Russia and Iran.
Libya: There was no break in the standoff between the government and a hodge-podge of militias, unions, separatists, and tribes that are preventing most of Libya’s oil from flowing to export terminals. So far the government has been unable to negotiate a settlement. Over the weekend Libya’s fledging army issued a strongly worded ultimatum to the protestors to release the oil or the country would collapse, but few believe the army has the strength to back up its demands. Last week however, after fierce fighting, an army unit in Benghazi succeeded in driving a powerful local militia from its headquarters and forced it to scatter.
With oil exports in the vicinity of 250,000 b/d, the government is only receiving 20 percent of the revenue that it was earlier this year. Soon the government will have no money to pay its employees, its Army, or the tens of thousands of militiamen that are on the government payroll as “security.” There is some talk of the US offering training to the armed forces, but other than this there is nothing on the horizon that might stabilize the situation and return oil flows to normal.
Egypt: The military government is becoming more autocratic all the time in its efforts to suppress the Islamists. Last week it sentenced a group of female protesters to 11 years in prison for participating in a pro-Morsi demonstration in the face of a new ban on public protests. Other demonstrations for human rights at the University of Cairo were broken up violently by riot police. Cairo currently is running on large loans from the Gulf Arab states in the hopes that its economy eventually will revive. If it does not, and the loans run out, we can expect more turmoil.
Syria: As the uprising drags on, disillusionment is growing in the rebel ranks as government forces with the help of Hezbollah appear to be making progress in regaining ground. Scattered fighting is continuing among the various rebel and tribal groups that make up the insurgency. Some insurgent groups and their leadership have turned into little more than criminal enterprises, selling oil from captured fields and smuggling goods into the country. Some rebel leaders seem more interested in hanging on to the power and wealth they have garnered by taking part in the uprising than in overthrowing the Assad government.
Things are not well for the government either, which has little economy left and is dependent on Moscow and Tehran for financial and logistical support. Insurgent attacks on the refinery in Homs and heavy fighting along the Damascus – Homs highway have resulted in a severe gasoline shortage in the capital. The government announced recently that its oil production has fallen from 380,000 b/d in March to 20,000 b/d.
Peace talks are now scheduled for January 22nd in Geneva. With both sides only interested in the unconditional surrender of the other, it is difficult to see that anything will be accomplished. In the meantime, the refugee crisis and the movement of insurgents across borders gets worse, threatening the stability of Lebanon, Iraq, and Jordan, and perhaps one day, the Gulf Arab states.
The big news from Beijing last week was the announcement of a new policy aimed at shutting down the country’s thousands of small, inefficient coal producers or forcing them to consolidate with the giant state-owned coal companies. These produce the bulk of the 4 billion tons of coal China consumes each year. The industry currently produces some 70 percent of China’s energy at the cost of many lives as well as a burgeoning pollution problem that could eventually slow or even halt economic growth.
Beijing clearly realizes that it cannot cut back on coal production without harming economic growth. It can, however, move coal burning out of its megacities where pollution is already at dangerous levels and take similar actions to reduce pollution. It would seem that the new policies are aimed at gaining more centralized control over the coal industry. Efforts to do this before have had little success as local governments derive revenue from taxing small private mines and they provide large sources of employment. The best estimate is that China’s coal consumption will continue to grow at its accustomed pace of nearly 10 percent a year for the immediate future.
For those keeping score, China continues to buy up foreign sources of oil and gas at a frenetic pace. Last week there were reports concerning recent deals from Iraq, Ecuador, British Columbia, and Egypt.
4. Quote of the Week
- “The most interesting message in this year’s World Energy Outlook from the International Energy Agency is also its most disturbing. Over the past decade, the oil and gas industry’s upstream investments have registered an astronomical increase, but these ever higher levels of capital expenditure have yielded ever smaller increases in the global oil supply. Even these have only been made possible by record high oil prices. This should be a reality check for those now hyping a new age of global oil abundance.”
— Financial Times (11/26)
5. The Briefs
- Statoil said it does not envisage production from several areas in the Arctic before 2030 at the earliest and more likely 2040 or 2050. Tim Dodson, Statoil’s exploration chief, cited high costs, regulatory complexities, and the world’s most challenging drilling environment. (11/26)
- Record Asian oil demand is spurring the region’s refineries to charter the most supertankers in a year, driving shipping rates to the highest level since 2010. (11/27)
- Spanish energy company Repsol would get $5 billion in compensation from Argentina for the expropriation last year of the firm’s YPF unit and its large holdings of unconventional oil and gas fields, according to those familiar with a preliminary deal. (11/27)
- Tullow published a country report on Uganda, tracking progress since it entered the country in 2004. Tullow says it has invested $2.8 million on oil exploration in Uganda where discoveries have uncovered more than 1 billion barrels of oil. (11/27)
- The U.S. State Department extended six-month Iran sanctions waivers on Friday to China, India, South Korea and other countries in exchange for their reducing purchases of Iranian crude oil earlier this year. (11/30)
- Asian LNG buyers’ reluctance to sign the long-term contracts that have traditionally underpinned big liquefied natural gas projects is causing a sharp slowdown in the industry worldwide. A key reason for the standstill is the North American shale gas boom, which promises a cheaper alternative to existing supplies. (11/25)
- Fracking may be impractical in parts of the UK due to the scarcity of local water supplies, and in other areas will have an impact on local water resources. The quantities of water required are very large, leading to cases in the US – where fracking is widespread – where towns and villages have run dry. (11/28)
- Poland is planning to speed up its search for shale gas, following the departure of several major US companies from Polish gas fields. Poland is one of the most promising exploration sites for shale gas in the European Union. But so far only several dozen wells have been drilled, with mixed results. (11/28)
- The development of shale gas in Europe could add as many as 1 million jobs to the economy, make industry more competitive, and decrease the region’s dependence on energy imports, according to a recently released study commissioned by the International Association of Oil & Gas Producers (OGP). (11/26)
- Sinopec, China’s largest state-owned oil and gas company, is in talks to invest in a $15 billion natural gas export project in northern British Columbia. China’s burgeoning investment in Canadian energy is facilitating a free-trade agreement that would essentially allow Beijing to nullify Canadian indigenous peoples’ rights to resources. (11/29)
- A major new study blows up the whole notion of natural gas as a short-term bridge fuel to a carbon-free economy. If, as now seems likely, natural gas production systems leak 2.7% (or more) of methane produced, then gas-fired power loses its near-term advantage over coal and becomes more of a gangplank than a bridge. The study was produced by fifteen scientists from some of the leading institutions in the world — including Harvard, NOAA and Lawrence Berkeley National Lab. (11/28)
- Compared to the EIA’s 2008 natural gas records, production in the northeastern states has increased almost six-fold to 12.3 billion cubic feet per day in 2013. The inflow of natural gas from other regions, such as the southwest, eastern Canada and from the Midcontinent region, has declined 60 percent compared to 2008 inflows. (11/27)
- US shale oil plays: While unconventional plays such as the Eagle Ford and Bakken are well-known, Drilling Info CEO Allen Gilmer told Rigzone he sees potential for exploration and production activity in 2014 and beyond for some emerging US shale plays. (11/28)
- In Pennsylvania, natural gas exploration companies drilled 30 percent fewer wells in 2012 and are on course to drill even fewer this year — thanks to lower prices for natural gas. About half as many drilling rigs are operating in Pennsylvania now as in early 2012, when the rigs began moving to more lucrative oil-producing regions. (11/25)
- Ethanol is less of a priority in Washington as declining fuel demand, lower energy costs and booming North American oil production result in waning support for a biofuel program tied to becoming less dependent on foreign oil. On November 15, the EPA proposed reducing by 16% the targeted amount of biofuel to be blended next year. (11/28)
- US ethanol production climbed 2.5% in the week ending November 22 to 927,000 b/d, matching the highest level so far this year, as makers of the biofuel boost output on cheaper corn costs. (11/29)
- Iogen announced that Brazilian ethanol giant Raízen Energia has started construction of a commercial biomass-to-ethanol facility using Iogen Energy’s advanced cellulosic biofuel technology. The $100-million plant will produce 10.6 million gallons (691 barrels a day) of cellulosic ethanol a year from sugarcane bagasse and straw. Plant start-up is anticipated in the fourth quarter of 2014.
- In China, a deadly pipeline blast lead Chinese authorities to seven people from Sinopec, the nation’s biggest refiner, after at least 55 died in the blast. (11/26)
- US coal has regained some ground this year as a power plant fuel—except in Appalachia, where natural gas for electricity generation has become extremely cheap. So much gas is being pumped from the Marcellus Shale, and so few pipelines are available to move gas from the area, that a glut has hit Pennsylvania and West Virginia, driving down the price of electricity and making it hard for coal to compete. (11/30)
- In China, explosive new car sales that transformed the nation into the world’s largest auto market are also giving life to a new industry here: used cars. By volume the used car market is still dwarfed by new cars, which outsold used vehicles three to one, but resales are set to grow quickly this year. (11/27)
- A major European utility said Tuesday it would scrap a wind farm that was due to become the largest offshore wind project ever built, a sign of the struggles of the industry to attract investment needed to overcome huge costs and technical challenges. (11/27)
- Russia’s economy has recently been extremely weak. It fell into technical recession in the first half of the year and it looks likely to post growth of only about 1 percent this year, down from an average over the past decade of just under 5 percent. Moscow’s strong past growth reflected a series of one-time factors, such as the revival of the oil industry from its post-Soviet slump, which cannot be repeated. (11/25)
- Venezuelan President Maduro promised to intensify his crusade against speculators and greedy businesses which he says are contributing to the oil-rich country’s economic troubles. He pledged more state control over sectors fueling sky-high inflation. (11/30)
- UN special envoy for Palestinian rights Richard Falk said the lack of electricity for 1.7 million residents in Gaza Strip is sparking a catastrophe. "The fuel shortage and power cuts have undermined an already precarious infrastructure, severely disrupting the provision of basic services, including health, water and sanitation. (11/27)