1. Oil and the Global Economy
New York oil prices topped out on Wednesday last week at just below $99 a barrel which was up nearly $7 a barrel since late November. When the weekly US stocks report showed an 11 million barrel buildup in US oil product stocks and weaker domestic oil product demand, prices began to fall. Total US petroleum consumption now has dropped 7.1 percent since mid-October – likely due to the various cutbacks in federal spending which took place this fall. On Friday NY oil futures fell 90 cents to close out at $96.60 on fears that the Federal Reserve meeting this week will cut back on bond buying thereby forcing up the dollar and reducing foreign demand for oil.
In London oil futures fell steadily last week, down about $4 from early December on hopes that oil shipments from Eastern Libya would be resumed soon.
The EIA reported that US crude production climbed a bit last week to 8.08 million b/d; however, the spectacular rate at which US crude production has been increasing during the last three years seems to be easing. Newly released data from North Dakota shows that increases in crude production, mainly from the Bakken fields, was up by only 8,500 b/d in October. This contrasts with increases of 51,000 b/d in July; 37,000 b/d in August; and 20,000 b/d in September. Bad weather across the northern plains this winter is likely to hamper production increases still further.
North Dakota completed 202 new oil wells in October while production was up less than 1 percent. This suggests that we may be nearing the day when it will take all the new wells that North Dakota can add each month simply to maintain its circa 1 million b/d rate of production. There are other indications that the era of rapidly increasing tight oil production may be coming to an end. The number of wells that have been drilled and are awaiting fracking has fallen from 1000 last December to 460 at the end of October. The length of new wells and the amount of fracking taking place is on the rise suggesting that best drilling sites are being rapidly used up. North Dakota also reported that Bakken oil, which is very light and must be shipped to refineries by relatively expensive rail cars, is selling for about $20 a barrel less than West Texas Intermediate. This suggests that profits from drilling in Bakken may be falling.
2. The Middle East & North Africa
Iran: Tehran’s delegation walked out of the technical talks on its nuclear programs last week to protest a new US blacklist of firms doing business with Iran. On Sunday, however, Iran’s Foreign Minister said his country would continue the negotiations despite the “unsuitable actions.” Iran’s immediate future is intimately linked with the ending of the sanctions, so political posturing that would slow negotiations is likely to be short-lived.
Iran cancelled its planned $500 million dollar loan to help finance the Pakistani leg of the Iran-Pakistan gas pipeline. Tehran noted that Pakistan has made no efforts to start construction on its part of the pipeline that is supposed to be completed by the end of 2014. The Iranians also noted that the sanctions had prevented it from accumulating hard currency for the project.
Tehran’s new natural gas pipeline to Iraq, which is already well under way, suffered a setback when masked terrorists, likely from Al Qaeda, showed up at a pipeline construction site and slaughtered some 18-25 construction workers and engineers, mostly Iranians, digging the trench. Tehran maintains the attack will not slow the project, but has called for the Iraqi Army to guard construction sites. The general lack of security in the region raise doubts that such a tempting target, which enhances the fortunes of the Shiite government in Baghdad, will ever deliver much natural gas.
Iraq: In addition to the killings of the pipeline workers in eastern Iraq, the usual round of bombings and shootings continued last week. Violence is now at the highest level since 2008. In another spectacular prison break, 22 suspected terrorists broke out of the al-Adela prison last week; Baghdad says most were caught or killed, but eight got away to fight another day.
The Iraq Oil Report says that oil from Kurdistan has already started to flow into Turkey through the province’s new independent pipeline. Realizing there is little they can do, Baghdad seems to be acquiescing in the deal and says that the Kurds must get world prices for the oil and funnel the revenues through the Iraq Development bank account in New York – an unlikely occurrence. Many observers fear that new oil revenues will allow the Kurds to form their own independent state setting off still more turmoil in the region.
Libya: The announcement by Libya’s Prime Minister that three eastern oil export terminals, with a combined export capacity of 600,000 – 900,000 b/d, would reopen soon appears to have been premature. A Libyan rebel leader said on Sunday that the ports would remain under control of local authorities and that exports would have to be negotiated with the Executive Office of the Cyrenaica Region. London oil futures fell last week on expectations that larger Libyan exports would resume soon. However, It now appears that oil production will remain in the vicinity of 200,000 b/d, half of which is going to domestic consumption, for the immediate future.
Tripoli’s gasoline shortage has entered its third week as the army deployed men to protect the city’s 22 gasoline stations which are dealing with mile-long lines of vehicles waiting to refuel. The price of gasoline on the black market is double that of the official price.
With the exports shutdown now entering its sixth month, the central government’s revenues are running low. It is already seeking foreign loans so it can keep paying its employees and the thousands of armed militiamen who are running around pretending to be “security.” The country is supposed to have $128 billion in foreign reserves, so there seems to immediate danger of financial collapse. However, there is no solution in sight to the fundamental question of who shares in the oil revenue. It may be quite a while before we see Libyan exports back above 1 million b/d.
It was an historic week in Mexico City when the Congress passed a bill changing the country’s constitution to end the government’s 75-year monopoly on oil and gas production in an effort to attract foreign investment and to restore economic growth. The bill has passed the Senate and House and will be sent to the states, half of which must approve any constitutional change. The move marks the end of an era in Mexican history beginning when the country threw out the British and American oil companies during a burst of nationalistic fervor. “Oil Expropriation Day” which dates to 1938 is still celebrated in many Mexican cities and towns.
As traditional sources of oil dried up and production sank, most Mexicans realized that it would take foreign technology to drill the deepwater wells and frack Mexico’s shale deposits. Mexican crude exports have fallen by a third since hitting 3.1 million b/d ten years ago. Mexican imports of US natural gas have doubled in the last few years and are due to increase rapidly as new pipelines are built and large quantities of refined oil products are being imported. Mexico is becoming an energy deficit state and if current trends continue will soon be importing more oil than it exports.
Proponents of the constitutional change hope that foreign oil companies will invest heavily to get at the 29 billion barrels of deep water oil that are believed will be found in Mexico’s Gulf waters. They are also interested in exploiting the large quantities of shale gas believed to be under their country.
The news from Beijing last week mostly concerned the economy, air quality, and climate change. Newly released economic figures show that China’s economy is doing better in the 4th quarter than most analysts had expected so that Beijing’s growth goal of 7.5 percent GDP growth this year should be attainable. Industrial output in November was up 10 percent from November of 2012.
Thick smog settled in over parts of eastern China last week sending air quality monitors off the scale. In one province eight cities were fined a total of $9 million for allowing air quality to deteriorate badly — showing that the central authorities are reacting to the people’s concerns about air quality. Shanghai registered the worst air conditions since record keeping began. Among Shanghai’s solution to dangerously high concentrations of air particles was to raise the threshold for triggering alerts. While China is making efforts to shut or move large coal burning facilities, this conflicts with efforts to maintain economic growth at 7.5 percent and is very difficult to achieve in a short period of time. We will undoubtedly be hearing more about this problem before the winter is over. Among the quicker solutions is to increase the importation of LNG as a cleaner substitute for coal.
Beijing released its first nationwide blueprint for adapting to climate change. This document seems to take the position that cutting carbon emissions in an effort to reverse climate change would be too costly to economic growth so a better approach is to develop plans to deal with the floods, extreme storms, drought, and tidal surges as they come along. The plans include developing early warning systems for forecasting bad conditions, better disaster response plans, artificial rain and insurance for those whose livelihoods are destroyed by extreme weather conditions. The plan does recognize that China with a long low coastline is highly vulnerable to climate change, but for now Beijing is not willing to give up economic growth, even with the accompanying pollution, as its primary goal.
5. Quote of the Week
[Congress made most oil exports without a license illegal in the 1970s to conserve supplies at a time when OPEC oil embargoes produced long lines at gas stations and threatened the American economy.]
- “The growing chorus from the oil industry to change longstanding US law to permit the export of American crude oil is a disturbing trend. This oil should be kept here in America, to benefit our consumers and to reduce our dependence on imports from the Middle East.”
— Senator Edward J. Markey (D-Massachusetts)
[But over the last five years a frenzy of oil drilling in shale rock formations in Texas and North Dakota have produced a glut of crude in the Midwest and Gulf of Mexico states.]
- “Those [1970s] restrictions on exports were born, as was the Department of Energy and the Strategic Petroleum Reserve, on oil disruptions. There are lots of issues in the energy space that deserve some new analysis and examination in the context of what is now an energy world that is no longer like the 1970s.”
— Energy Secretary Ernest Moniz
6. The Briefs
- Global energy demand is on course to be about 35 percent higher in 2040 than it was in 2010, ExxonMobil says in its annual long-term energy forecast. China and India together will account for half of the projected growth in global demand. (Dec 14)
- Saudi Arabia says it won’t unilaterally cut oil production as it and fellow OPEC members discuss how to cope with a possible increase in global crude output. (Dec 13)
- In Russia, Energy Minister Novak said its oil output for 2013 should reach a post-Soviet record of 3.8 billion barrels. State news agency RIA Novosti reported that in 2012 Russia increased oil output from the previous year by 1.3 percent to approximately 3.79 billion barrels. (Dec 10)
- Nigeria’s President Goodluck Jonathan is under growing pressure from top-level corruption in the oil industry, with the central bank asking what happened to $50 billion in missing oil revenues, and his political mentor, former president Gen. Olusegun Obasanjo complaining about massive fraud. Meantime, oil theft in the Niger Delta is rising. Militants threatened to bring oil production to a halt by 2015 unless the government and foreign oil companies compensate impoverished villagers for environmental damage in the region and introduce more equitable sharing of oil revenue. (Dec 13)
- Canada is considering measures to treat crude oil as a high-risk, dangerous product that would require rail shippers to have government-approved emergency-response plans in place. The initiative would be part of a broad package of measures the Canadian government will likely unveil early in 2014 to boost rail safety. (Dec 14)
- Drilling rigs targeting oil and natural gas in the U.S. increased by seven this week to 1,782, according to Baker Hughes. Oil rigs jumped 14 to 1,411, a six-month high, while the gas count dropped six to 369. The US has added 40 rigs since Nov. 1 as producers increasingly use a combination of horizontal drilling and hydraulic fracturing to reach shale deposits of crude in Texas’s Permian Basin. (Dec 14)
- US rail delivery of crude oil was up 18.6 percent last week from the previous week, the American Association of Railroads said. So far this year, 665,450 carloads, or about 465 million barrels of oil, were delivered by rail, a 32.1 percent increase from the same period last year. (Dec 14)
- Some 56% of Americans view the Keystone XL oil pipeline as more of a benefit to US energy security than as an environmental risk; even as they say Canada should do more to reduce greenhouse gases in exchange for approval of the project. Another 35% say they see it more as a potential source of damaging oil spills and harmful greenhouse gas emissions. (Dec 13)
- Oklahoma has never been known as earthquake country, with a yearly average of about 50 tremors, almost all of them minor. But in the past three years, the state has had thousands of quakes. This year has been the most active, with more than 2,600 so far, including 87 last week, one hitting a magnitude 4.5. (Dec 13)
- Utah is suddenly seeing a burst of activity that it hopes will make it the next North Dakota. The push is being led not by global energy titans, but smaller companies that have honed their techniques looking for oil in places like North Dakota’s Bakken Shale. However, the surge in oil drilling in places like Vernal has drawn the ire of the state’s far-larger tourism-and-recreation industry, which doesn’t want drill pads and oil-tanker trucks in the spectacular scenery of the high desert. (Dec 12)
- Ethanol futures fell in Chicago, capping a second straight weekly drop, on concern a requirement to blend corn-based ethanol with gasoline will be eliminated, while US production climbed to a 23-month high of 944,000 b/d. (Dec 14)
- The US military will soon be able to purchase advanced biofuel blends through its regular procurement practices, the departments of Agriculture and Navy announced Wednesday This will pave the way for military planes and ships to use more alternative fuels. (Dec 12)
- Iran expects to begin exporting gas to neighboring Iraq by July next year, with initial volumes set at 7 million cubic metres per day, and the volume expected to increase to 25 mcm/day by 2015 and ultimately 40 mcm/day. (Dec 9)
- PGNiG, a Polish state-owned energy company, said it reached a deal with a Chevron subsidiary to explore for shale natural gas in southeastern Poland. Chevron said if the exploration effort proves successful, both sides would form a joint venture for further operations. (Dec 14)
- In Pakistan, a government minister said sanctions on Iran’s energy are curbing progress on a bilateral gas pipeline but Islamabad was committed nonetheless. (Dec 14)
- In South Korea, natural gas demand is forecast to grow 1.7% annually to 2035, the country’s Ministry of Trade, Industry and Energy said in a report. But the country’s oil demand is expected to shrink 0.11 percent annually. (Dec 10)
- Ukraine was able to reach an agreement with Russia to defer payments toward debt incurred this year from natural gas deliveries from Russian energy company Gazprom. (Dec 12)
- British energy company BG Group said it estimates there are 15 trillion cubic feet of natural gas in its reserve basins off the Tanzanian coast. The company‘s latest discovery, dubbed Mzia, off the southern Tanzania coast holds an estimated 4.7 trillion cubic feet of total recoverable natural gas. (Dec 11)
- Exxon Mobil, in its annual forecasts of the energy outlook for the next three decades, says that around 2025 gas will become the world’s second most-used fuel on an energy-equivalent basis, behind oil. By 2040, it expects natural gas consumption to rise 65 per cent, but coal use to be no higher than it is today, rising and then falling again during the next two decades. (Dec 12)
- FLNG Liquefaction LLC has let contracts for construction engineering forplanned LNG export from the LNG import terminal on Quintana Island near Freeport, Tex. (Dec 11)
- BHP Billiton, the world’s largest miner and a top investor in U.S. oil and gas, said its U.S. shale business would break even by 2016, generating cash that would grow to almost $3 billion a year by the end of the decade. Analysts have voiced concern over the growing proportion of BHP’s spending being allocated to petroleum, where its volumes and returns have proven disappointing. (Dec 11)
- Russian President Putin has told his military leadership they should build up their forces in the Arctic as a priority. Commending the recent restoration of an airfield in the region, he said Russia needed to use every means to protect its national interests in the resource-rich region. (Dec 11)
- Canada filed preliminary information concerning the expanded outer limits of its continental shelf in the Arctic Ocean, which could include the North Pole. (Dec 10)
- India wants to boost its nuclear power-generation by more than ten times over the next two decades to cut dependence on imported fossil fuels, but there’s one problem: global companies don’t want to sell India the equipment it needs to run nuclear power-plants under existing rules. Foreign equipment-makers are worried about an Indian law, passed in 2010, which would make them liable to pay compensation in the event of an accident. (Dec 10)
- The total cost of Japan’s Fukushima nuclear plant meltdown may never be known, but the country has at least put a number on how much it anticipates storing the radioactive debris will cost it–$10 billion for the purchase and development of land for “intermediate storage facilities,” plus construction and operation costs. (Dec 12)