1. Oil and the Global Economy
New York oil futures climbed steadily last week to settle at $99.32 – up about $2.50 a barrel for the week. An unexpected upward revision in the 3rd quarter US GDP numbers, coupled with higher demand for gasoline in the US and lower US crude stocks, was behind the increase. The Federal Reserve’s announcement that it will gradually slow bond purchases contributed to the optimism that an economic rebound and higher oil consumption is coming soon. In London, oil closed at $111.77 on Friday on concerns that Libyan oil production will not resume in the foreseeable future. London oil is now trading within a few dollars of the highs it has reached in the last five years.
There was a surge in gasoline futures last week with the January contract closing at $2.78 a gallon on Friday, up 15 cents during the week and up 28 cents since early November. The weekly increase was the largest since early July. The EIA reported that US fuel consumption climbed 13 percent to 21 million barrels a day last week, the highest since the spring of 2008.
US exports of oil products to Europe are at record levels. Sixteen European refineries have closed or downsized in the last five years which has more than offset the reduction in the demand for oil products in Europe. The difference is being made up by US refineries which have the capacity, can use US crude which is cheaper than Brent, and are fired with cheap US natural gas. Taken together these factors are enough to offset the costs of shipment.
Natural gas prices rose last week reaching their highest in nearly two-a-half years as unusually cold weather engulfed the northern US. Prices eased slightly on Friday to close at $4.41 per million BTU’s after a warming trend set in. The US gas inventory fell by 285 million cubic feet the week before last which was more than expected. Stockpiles are now 7.4 percent below average for this time of year which is the largest deficit since record keeping began 20 years ago.
2. The Middle East & North Africa
Iran: The nuclear weapon talks which came to a halt the week before last after Washington released a new sanctions blacklist, resumed last Thursday. Diplomats say there is a real political will to reach an agreement especially on the Iranian side. Tehran realizes that its economy is being torn to pieces by the sanctions and that with the surge in US oil production and the lack of any significant price increases, its customers can hold out longer than it can.
Most of the news came from Washington last week where a group of US senators are threatening harsh new sanctions which might threaten final agreement. The new sanctions would be imposed if Iran violates the interim agreement or fails to reach a permanent settlement in a timely manner. Some believe the new bill would strengthen Washington’s hand in the agreement, while others see it as an effort to torpedo the rapprochement with Tehran and settle the issue with military force. The White House strongly opposes the new bill.
Tehran is telling Islamabad to find a third party to finance the Iran-Pakistan natural gas pipeline. The Iranians backed out of the project the week before last, citing the sanctions for their inability to raise the necessary $500 million they had promised to build the line across Pakistani territory.
Libya: The slide into chaos continues, lessening the chances that there will be any increase in Tripoli’s oil shipments in the near future. As best as can be made out, Libya is producing about 200,000 b/d; is consuming about 100,000 b/d in its own refineries; and exporting the rest. Last week the ubiquitous militias that have been parading around waving guns since the uprising fled the cities from a combination of civilian protests and armed groups. What little security they provided is gone leading to increased anarchy. Over the weekend a mob, with obscure demands, occupied the offices of Libya’s internet provider shutting down services for a while. On Sunday a suicide bomber killed at least six and wounded 15 in an attack on a military base outside of Benghazi. Most countries have closed their consulates in Benghazi and several foreign airlines have stopped flying to the city.
Iraq: The usual bombings and killings continued last week. At least 18 Iraqi soldiers including the commander and other senior officers who supervised the crackdown on Sunni protestors earlier the year were killed in a multiple suicide bomber ambush in Anbar province. Many of last week’s attacks were directed at Shiite pilgrims making their way to shrines in Iraq during the 40-day mourning period for the Prophet Muhammad’s grandson. A busload of pilgrims coming from Pakistan was shot up, killing three.
The death toll for the year is now double what it has been in the last five years but is still below that of 2007 which was the height of the post-invasion violence.
A test of the new pipeline that will carry oil from Kurdistan to Turkey is continuing as negotiations between the Turks and Kurds on one side and the Iraqi government continue. Baghdad fears that once the Kurds gain a steady revenue stream from selling oil, they will declare independence. This could easily be followed by the southern provinces, leaving Baghdad with little oil revenue.
South Sudan: The already unstable political situation took a turn for the worse last week as a clash between army factions spiraled into a nationwide rampage with hundreds killed and forced tens of thousands to seek refuge in UN camps. Despite government claims that oil production has not been harmed, foreign oil workers including many Chinese are being evacuated and the capital of the main oil producing province has been captured by rebel forces. Most foreign governments advised their citizens to leave the country and four US military personnel were wounded as three US evacuation aircraft were fired on while picking up refugees.
On Sunday troops loyal to the former Vice President took control of the capital of the country’s key oil producing state. Most observes are saying the country is on the verge of an ethnic civil war with the prospects for oil exports in the near future very much in doubt.
3. The EIA’s Annual Energy Outlook
The release last week of the early overview of next year’s Annual Energy Outlook has created quite a stir in the media and peak oil circles. In its release the EIA “projects or suggests” (they say the don’t forecast) that US production of shale oil (the term coming into vogue is “light tight oil,” LTO) will continue to increase by 800,000 b/d for the next three years so that total US oil production will hit 9.5 million b/d, just below the all-time high hit in 1970. After 2016 production is to suddenly level off for four years and then gradually decline until by 2040 it has only fallen to only 7.5 million b/d. This new projection is about 2 million b/d higher than last year’s US peak of 7.5 million b/d which was projected to be reached about the same time.
The reason for this new evaluation is undoubtedly the rapid jump in US shale oil production which now has taken total US oil production to just above 8 million b/d – some 500,000 b/d higher than the EIA was projecting just last year for 2015. Needless to say the media was ecstatic – claiming that the new estimate will make the US energy independent before we know it. The key question is whether we are seeing an over-reaction on the part of the EIA or is it realistic to assume that that US tight oil production will double to 4.5 million b/d in the next three years and then hold level for another five years.
Many are of course skeptical of the EIA’s assertion, citing the rapid decline rates that have been reported for wells that have been drilled and fracked in shale fields. For the past three months, the EIA has been producing a “Drilling Productivity Report” on tight oil production in the US. The numbers given in this report seem to say that it will be very difficult to grow production in the coming years as most of the oil coming from newly drilled wells will simply offset the decline in production from currently producing wells. Many experienced analysts see US tight oil production peaking in the next one to three years and declining rapidly thereafter.
In the last year or so, drilling for tight oil has been concentrating on a limited number of productive “sweet spots” both in Texas and North Dakota. The extent of these sweet spots and how densely they can be drilled in the next year or so will likely determine whether the EIA or its critics are right.
4. Quote of the Week
- “[Fracking shale] creates an initial production spike that soon turns south: Behind the headlines boasting of a U.S. oil boom, producers have been grappling with rapid production declines at aging shale-play wells. The only answer: drill more and more wells.”
— Collin Eaton, The Houston Chronicle (12/16/13)
5. The Briefs
- In Mexico, President Peña Nieto signed into law Friday a bill that ends the 75-year-old government monopoly in the oil and gas industry, even as the main leftist party is pledging to undo the law by organizing the country’s first-ever referendum. (12/21)
- Saudi Arabia will go it alone in boosting the capacity of an offshore oil field in its shared neutral zone with Kuwait after its neighbor withdrew from the project due to political deadlock between parliament and the government. (12/20)
- A proposed oil pipeline from central Uganda to the coast of Kenya could be a vital step toward unlocking East Africa’s potential, Wood Mackenzie said Wednesday. Wood Mackenzie estimates it will cost at least $4 billion to build an 869-mile long pipeline from central Uganda—a land-locked country—to the Kenyan coast. (12/19)
- BP said the Gila prospect in the Gulf of Mexico produced a “significant” discovery, capping the most successful year for their worldwide exploration since 2004 for Europe’s second-biggest oil company. Gila is the seventh discovery from 15 exploration wells completed this year and follows potentially commercial finds in India, Egypt, Angola and Brazil. (12/19)
- BP said Wednesday it would write off more than $1 billion in costs related to an unsuccessful Brazilian well. (12/18)
- Brazil will get more than $400 billion in royalties and crude oil over the next 35 years from its share of the massive Libra offshore oil prospect, President Rousseff said Tuesday. (12/18)
- Enbridge‘s proposed Northern Gateway pipeline project cleared a key hurdle Thursday after a Canadian advisory panel recommended it. The pipeline would connect Alberta’s landlocked oil sands to a Pacific coast port for export primarily to markets in Asia. (12/20)
- Ecuadoreans trying to collect a $9.5 billion environmental verdict against Chevron Corp. can attempt to seize the oil giant’s assets in Canada, a Canadian appellate court ruled on Tuesday. The plaintiffs, residents of Ecuador’s jungles, are seeking to enforce a 2011 judgment against Chevron by confiscating its properties in other countries where it operates. (12/18)
- The US drilling rig count dropped 14 units to settle at 1,768 rigs working last week. Oil rigs were down 16, settling at 1,395; gas rigs were up 3 units to 372. In Canada, a 28-unit drop in oil rigs brought that total to 227, gas rigs were unchanged at 171, with the total at 398. (12/21)
- A budget deal passed by US lawmakers this week included consent for theTransboundary Hydrocarbon Agreement between the United States and Mexico, allowing oil and gas development within the maritime border with Mexico. (12/20)
- North Dakota said oil production in October, the last full month for which data are available, was 941,637 barrels per day, an all-time high for the state. (12/20)
- In eastern Montana, the recent spurt in oil production probably will continue for at least a year, a top Montana oil and gas official said, but efforts to find a similar big resource play in north-central Montana are not panning out yet. (12/16)
- Government auditors criticized the US Interior Department for considering and then delaying plans to raise the royalty rate for oil production on public lands from 12.5% to 18.75%, saying that’s resulted in “foregone revenue.”
- The 485-mile Gulf Coast oil pipeline from Oklahoma should be moving oil by the middle of January, a spokesman for TransCanada said. The Gulf Coast project from the oil storage hub in Cushing, Okla., is designed to carry as much as 700,000 barrels per day to refineries in the Houston area. (12/19)
- Dolphins in an area hard hit by the Macondo oil spill in 2010 are suffering from lung diseases and other abnormalities that are consistent with toxic exposure to oil, according to a study backed by the federal government. (12/19)
- In India, a Parliamentary standing committee has expressed fear that the country could witness acute shortage of natural gas in two years, which may not be met even through imports due to lack of infrastructure. (12/17)
- Israel is studying its options for exporting its natural gas riches in the eastern Mediterranean. Instability in neighboring Egypt and friction with former ally Turkey means leaves a joint export operation with neighboring Cyprus looking like the frontrunner. (12/21)
- An area more than two-thirds the size of England is to be opened up to shale gas drilling and other forms of exploration under plans set out on Tuesday that ministers said could produce thousands of jobs and other economic benefits. (12/18)
- Asia’s biggest economies face paying twice as much for some natural gas as old supply deals are renewed, with a North American shale glut years from helping to meet soaring demand in the region. (12/16)
- Marcellus shale gas production boosted Pennsylvania from the seventh-largest to third-largest marketed US natural gas producing state from 2011 to 2012, and may lift the state to the rank of second-largest natural gas producer this year according to recent EIA data. (12/20)
- Fluid used in hydraulic fracturing contain chemicals that can disrupt the functioning of human hormones and lead to a greater chance of infertility, cancer and other health problems, researchers said Monday. (12/18)
- Coal once again displayed the largest demand growth of all fossil fuels in 2012, according to the IEA. Executive director van der Hoeven said that in 2012, coal consumption in the world’s two largest markets, China and the US, was “abnormally weak.” (12/17)
- In Australia’s coal mining sector, the longer-term prospects that China’s demand for coal will decline—as a result of environmental-related factors—will likely increase the risk that Australian coalmines, reserves and coal-related infrastructure become stranded assets. (12/17)
- Venezuela is overhauling decade-old currency controls to benefit its struggling oil industry and arrest the decline of the bolivar on the black market. (12/17)
- Venezuelan President Maduro signaled he wants to raise gasoline prices, which are considered among the cheapest in the world at about 5 cents a gallon. The gasoline subsidy costs Venezuela about $12.5 billion a year. (12/21)
- If Egypt follows a low birth-rate scenario, its population will reach 100 million by 2036, then hitting 105 million by 2050 and settling at that level. If, however, fertility rates are high, Egypt will break 100 million by 2025, and reach 140 million by the year 2050— a scenario that can only be described as "national suicide." (12/18)
- Australia’s renewable energy target appears to be on the table following Prime Minister Tony Abbott‘s decision to review the country’s energy policy with an eye towards reducing energy costs. (12/19)
- The Pennsylvania Supreme Court ruled Thursday that several provisions of Act 13, signed last year by Gov. Corbett to overhaul the state’s oil and gas laws, violates the Environmental Rights Amendment to the Pennsylvania Constitution. (12/21)
- US energy tax incentives would be cut by more than half under a draft plan released by Senate Finance Committee Chairman Max Baucus. Today’s proposal would end tax breaks for energy efficiency, electric cars and appliances, and doesn’t directly address many of the tax breaks used by oil and gas companies. A sepate Baucus draft proposal last month eliminated or curtailed many of those provisions, including expensing of intangible drilling costs. (12/19)
- Two Democratic lawmakers in the U.S. House of Representatives said they wanted to hold arings to assess methane emissions emitted during production, processing and distribution of hydrocarbons in the oil and gas sector. (12/19)
- Japan has decided to take matters into its own hands to find appropriate domestic locations to permanently store highly radioactive nuclear waste, after waiting in vain for more than a decade for an offer from a regional government. (12/18)
- Tokyo Electric Power Company, operator of Japan’s stricken Fukushima nuclear power plant, will decommission the facility’s two remaining reactors, Units 5 and 6. Reactors 1 to 4 were declared defunct in April, 2012, 13 months after the devastating 2011 earthquake and tsunami. That leaves Japan with just 48 operable nuclear reactors, all of which remain offline, pending safety checks. (12/20)