1. Oil and the Global Economy
Oil prices remained flat last week as news supporting higher prices balanced off news that would tend to push prices lower: large US crude stocks; improved US employment numbers which including the fourth straight month of job gains above 200,000; Libya falling apart; equity markets doing well; optimism about Ukraine; and the approach of the summer driving season all factored into the balance. At the end New York futures closed at $102.22 a barrel and London at $108.61.
In contrast to the oil complex, natural gas futures continued to rise last week on concerns that warmer weather will prevent adequate injections into US stockpiles this summer to avoid shortages next winter or in the years ahead. During the week natural gas futures rose 3.7 percent to close at $4.71 per million BTUs. Despite higher injections the week before last, US inventories of natural gas are still 37 percent below the five-year average for the week. The consulting firm Wood Mackenzie said last week that natural gas production from the Marcellus shale is now above 12 billion cubic feet per day and Ohio’s Utica shale gas production is now above 1 billion. Wood Mackenzie expects that these numbers will increase to 20 billion for the Marcellus and 5 billion the Utica by 2018. No mention of what is going to happen to the rest of US natural gas production, which has been falling in recent years.
US natural gas production reached a high of 68.2 billion cubic feet per day during May with the average for the month up by 4.6 percent over May 2013. The Natural Gas Supply Association, however, expects that gas prices will move “slightly” higher this summer because of hot weather, increasing demand for gas and the need to inject a larger amount of gas than usual into storage.
New rules that will limit the flaring of natural gas in North Dakota may slow down the growth of oil production there. Starting on June 1st drillers in the state will have to submit plans to capture any natural gas that emerges from new wells before a drilling permit will be issued. This of course can get expensive as natural gas requires pipelines to move the gas to market. One solution is to compress the gas on site and use it to power equipment or vehicles.
The EIA released a short study last week pointing out that 96 percent of the growth in US domestic oil production in the last three years has been very light, sweet oil with an API gravity above 40. More than 60 percent of the EIA’s projected growth in US oil production during 2014 and 2015 will be of the same grades. The study is one of a series of papers dealing with the possible relaxation of US crude export restrictions to reduce the glut of light oil.
Questions are arising as to whether the recent announcement by Total to shelve an $11 billion project to increase production at the Alberta tar sands marks a peaking of new investment in the sands. Some economists see numerous small signs that the recent wave of new investment in sands projects may be coming to an end. Oil extracted from the sands is currently some of the most-expensive-to-produce on earth and may no longer be that profitable as production costs continue to increase.
There has been much discussion concerning last week’s IEA report, World Energy Investment Outlook, which says that the world will need to invest $48 trillion in finding and producing new oil in the next 20 years. The report also changes the Agency’s two-year old forecast on the prospects for US shale oil production. In 2012 the Agency had forecast that increasing US shale oil production would continue increasing indefinitely and make the US the world’s largest oil producer by 2020 and a net oil exporter by 2030. In its new report, the Agency says that US tight oil production will plateau by 2020, and will start to fall a few years after that.
Needless to say, peak oil analysts were ecstatic at this change by the IEA for it essentially is predicting that world oil production will start decreasing by the end of the decade as only the rapid growth in US shale oil production and very high levels of investment has sustained global production levels in recent years.
In its discussion of the report, skeptics such the Wall Street Journal focused on the need for increased oil production from the Middle East and the need for much greater investment in the immediate future. The IEA forecasts that if the required amounts of investment do not take place, the price of a barrel of oil could climb by $15 in the next ten years. This seems a rather modest figure considering the implications of the impending decline in world oil production.
2. The Middle East & North Africa
Iraq: The violence continues unabated with bombings and insurgent attacks growing in number and severity. Maneuvering to form a new government continues; however key Shiite coalitions are urging that Prime Minister Maliki not be part of a new government. Given the level of violence, forming a new government will be difficult. Sunnis and Kurds seem unlikely to participate.
The opening of a new single point mooring buoy at the Basra oil export terminal increased exports by an average of 70,000 b/d in May over April. Exports in May averaged 2.58 million b/d despite the loss of the northern export pipeline to Ceyhan, Turkey to insurgent sabotage.
The saga of the Kurdish export tanker continues. The Turks apparently allowed a tanker containing a million barrels of crude to leave the Ceyhan terminal heading for the Western Hemisphere. West of Gibraltar the tanker received orders to turn around and return to Morocco. After anchoring there, the Moroccan government ordered the tanker to leave its waters as it did not want to get involved in the Erbil-Baghdad dispute. The Turks say they are helping Iraq by letting its oil get out. Baghdad is suing the Kurds in international courts to stop the shipments. The Kurds accuse Baghdad of an oil grab, but deny that its oil exports are a prelude to seeking independence.
For now Iraqi exports are rising, but so is the violence.
Libya: Another week and the situation becomes still more confused. With rival governments and a rogue general running around, the violence is growing. Attacks on senior officials by rival organizations are increasing. The Libyan Air Force has joined the fray by attacking Islamist militia bases in Benghazi.
The Islamist dominated Congress, where few show up to vote, has appointed the third prime minister in four months, but the old one has left Tripoli for the Eastern province taking his cabinet and part of the Congress with him.
Oil exports are said to have averaged 167,000 b/d in April, largely because of offshore production which is relatively immune to the turmoil. Some are saying that exports either are, or soon will be, zero. It looks as if we should write off Libyan oil production for the immediate future.
Iran: Nuclear negotiators are saying that an imminent deal appears to be in jeopardy and that fuel for Iran’s nuclear reactor remains a sticking point. Washington says that world crude supplies are currently adequate to sustain another cut in Iranian exports should additional sanctions be necessary. The US also announced that there are no signs of a Russia-Iranian oil swap deal that would undercut the sanctions. Such a deal was rumored a few weeks back at the height of the Crimean crisis when Moscow was looking for ways to retaliate against the West.
A senior Russian official said that a second natural gas pipeline to China is being negotiated now that a compromise on a natural gas price formula has been achieved. The second pipeline which will be called the ‘western route” will be less expensive than the first one, but will still cost billions of dollars. Moscow seems to be making an all-out effort to compensate for the likelihood of reduced natural gas sales to Europe.
Beijing’s environmental problems continue to grow. The government has vowed to limit population growth in the largest cities, but will liberalize rules allowing rural residents to move into smaller ones. A new study shows that only 5 percent of China’s cities are meeting air quality standards. China is running out of land and has been pushing mountain tops into valleys to create more flat land to build on. A new report says that large scale mountain top removal could be an environmental folly and urges a halt to the projects until adequate environmental impact studies can be completed.
Beijing is still struggling with maintaining economic growth. Exports rose by 7 percent in May, but imports declined by 1.6 percent. In the 1st quarter, China’s GDP growth slowed to 7.4 percent from 7.5 percent in the last quarter of 2013. The government is reacting favorably to the US announcement that it intends to reduce carbon emissions significantly. Beijing has been saying for years that the US, as the world’s largest per capita emitter of carbon, must take the lead before China is willing to take the economic hit of reducing emissions. The Chinese may be living up to their word – after all they have a coastline too which is even more vulnerable to rising sea levels than that of the US.
It is hard to see where this situation is going from the viewpoint of world oil flows. So far China is clearly the big winner with Moscow agreeing to sell it large amounts of natural gas on acceptable terms. Oil and natural gas are still flowing out of Russia as neither side wants to accept the consequences of a disruption. Even the long simmering question of Russian natural gas sales to Ukraine seems to be coming to conclusion. Ukraine has sworn in a new President who is seeking peace but is unwilling to give up territory, even the Crimea, to Moscow. Fighting continues in Eastern Ukraine where government forces are confronting ethnic Russians, many of whom have come from deep inside Russia, claiming they are confronting some sort of Nazi revival in Kyiv.
The situation is still fraught with many dangers to world oil and gas flows as Moscow and the West continue to exchange threats of sanctions. It is interesting that Russia’s oil production is down, albeit slightly, for the fifth month in a row. Many outside analysts have been expecting that Russia’s oil production which stretches back over a century will peak someday soon. Recent developments may or may not be a sign that this is starting to happen; however Russia is a very big country — there is the arctic to exploit and maybe even a lot of shale oil.
5. Quote of the Week
- “Of the $40 trillion in investment in energy supply [between now and 2035], more than half is required just to keep the energy system producing at today’s levels, that is, to compensate for declining output from existing oil and gas fields, to replace power plants that are retired, or equipment that reaches the end of its operational life.”
— Maria van der Hoeven, Executive Director, International Energy Agency
6. The Briefs
- The IEA said the world will need to invest $48 trillion in energy production and energy efficiency between now and 2035, including more Middle Eastern oil in the next decade as the current U.S. boom wanes. But the IEA warned that Persian Gulf producers may still fail to fill the gap, risking higher oil prices. (6/4)
- The IMF has called on Norway to cut back on spending its oil income, saying the economy needs no further stimulus and the government should focus on fostering private sector growth instead as it begins the long transition to life after oil. The government needs to cut back, both to save the oil income and maintain a more neutral fiscal stance, the fund said. (6/5)
- In Iraq, Russian energy company Lukoil said it was including construction of two 75-mile pipelines in the terms of its contract for the West Qurna-2 oil field. The system will link the oil field to an export terminal in Basra, situated along the coast of the Persian Gulf. First oil was produced from West Qurna-2 in March. It has since reached a daily production reach of 120,000 barrels and has an estimated 34 billion barrels worth of recoverable reserves. (6/7)
- Nigeria’s petroleum minister said that Nigeria no longer has any tangible trade in crude oil with the US, following the North American shale oil boom. At a forum on the Petroleum Industry Bill which is awaiting passage in the National Assembly, the minster warned that the loss of the US market should help convince the legislature to pass the bill. (6/5)
- Canada is enjoying an unexpected and abrupt boom in production of ultra-light crude known as condensate, defying long-held predictions of dwindling supply. The new supply from Alberta’s Duvernay field, a hot and relatively new shale plays. It also is fuelling hope of cost relief for traditional heavy oil sands companies who in the past have paid premiums of up to $25 a barrel to buy imported condensate used to dilute their viscous oil sands production so that it can flow through pipelines. (6/7)
- Since the proposed Keystone XL pipeline, which would ship oil from Alberta to the Gulf of Mexico, remains uncertain, Canadians are exploring shipping their product directly to overseas markets. (6/6)
- In Canada, hundreds of scientists have signed a letter sent to Prime Minister Harper blasting a federal review recommending the approval of the Northern Gateway tar sands pipeline as biased. Harper is expected to decide whether to approve the $7 billion pipeline, which will extend from Alberta to British Columbia, this month. (6/5)
- Exxon Mobil won the first three oil and gas leases for an area of 1.5 million acres straddling the U.S.-Mexican border in the Gulf of Mexico. The U.S. Interior Department estimates the area, Alaminos Canyon, contains as much as 172 million barrels of oil and 304 billion cubic feet of natural gas. (6.2)
- Marathon Oil is selling its Norwegian business for more than $2 billion in cash as part of a drive by the Houston-based energy company to sell its North Sea oil-and-gas operations to focus on the U.S. (6/2)
- Total US energy production reached 81.7 quadrillion Btus (quads) in 2013, enough to satisfy 84% of US energy demand, which totaled 97.5 quads. The portion of US energy consumption supplied by domestic production has been increasing since 2005, when it was at its historical low point (69%). Fossil fuels accounted for 82 percent of domestic consumption, renewables 10 percent and nuclear energy 8 percent. (6/2)
- Total US crude oil production averaged 8.3 million barrels per day in April, the highest monthly average since March 1988, according to the U.S. EIA. By 2015, the average should reach 9.2 million bpd. (6/7)
- The US drilling rig count dropped 6 units to 1,860 rigs during the week ended June 6th, Baker Hughes reported. The decline follows BHI’s report that the average US rig count for May was 1,859, 24 more than April’s count and 92 more than in May 2013. Gas rigs decreased 6 units to 320 while oil rigs remained unchanged 1,536. (6/7)
- More railroad system inspections are needed to ensure oil delivered on the U.S. rail network is safe, a leading Republican senator from North Dakota said. (6/6)
- North American refiners’ earnings per barrel of oil processed were more than $6 per barrel higher than their European competitors for the first three months of 2014, thanks in large part to lower prices for crude from North American producers. (6/6)
- Reform of natural-gas pricing in India, if it moves forward, would revive oil and gas investment and help the government balance its accounts, according to a new study by IHS. Although the government has announced plans to allow gas prices to increase this year to $8.50 million BTUs from $4.20, it didn’t act before national elections held last month. The current price level is about a third of the cost of gas imported into India, with imports meeting 35 percent of local gas needs. (6/6)
- Across northern India, thousands of people enraged by power cuts during an extreme heat wave have been rioting, setting electricity substations on fire and taking power company officials hostage. The impoverished state of Uttar Pradesh has never had enough power for its 200 million people; many receive only a few hours a day under normal conditions, while 63 percent of homes have no electricity access at all. (6/7)
- In Venezuela, Italian energy company Eni said it signed an agreement to help develop the Perla gas field. Billed as one of the largest gas discoveries in the world, Eni said the Perla field 30 miles off the coast holds an estimated 17 trillion cubic feet of natural gas. (6/6)
- Michigan’s attorney general filed criminal charges against Chesapeake Energy Corp., alleging that the natural-gas producer misled landowners to obtain leases in the state. (6/6)
- US coal stockpiles fell for the week ending Friday, down 32 percent from the five-year average. Lower coal production (down 3%) and higher coal consumption (up 6%) during the week meant US coal stockpiles have dipped for the second week in a row. The decline comes as utilities also face natural gas inventories 37 percent below the five-year average. (6/7)
- Hybrid-electrics vs. diesels: new US registrations of cars and SUVs during 2010 through 2013 show that while diesels increased by just under 200,000, hybrid-electrics increased by just over 1.1 million. (6/6)
- Atlanta is the #2 electric car market in the US. Why? Georgia provides more than $4,000 in income-tax credits on average for an electric-car purchase, cut-rate electricity, employer support of recharging stations and, in Atlanta, access to high-occupancy vehicle lanes in the city’s congested roadways. Atlanta’s emergence illustrates how public subsidies remain key to luring buyers away from gasoline-powered cars. (6/5)
- China’s renminbi is rapidly displacing the US dollar as a trading currency not only in Asia and Europe but now also in the US home market. The value of renminbi payments between the US and the rest of the world rose by 327 per cent in April this year from the same month a year ago. (6/5)
- Although China may be cheaper than Europe at producing solar panels, it comes at a cost to the environment that is twice as high. Weaker environmental standards and more highly polluting sources of energy used by Chinese manufacturers are the reasons for the discrepancy. (6/2)
- Venezuela is a record $25 billion in arrears to importers while President Maduro is using the nation’s dwindling supply of dollars to pay interest to bondholders. By putting off the local companies responsible for supplying everything from diapers to cancer medications, Maduro is fanning flames of violent protest. (6/6)
- Colorado State University increased the number of storms it expects to develop during the Atlantic hurricane season to 10 from nine. The forecast calls for four of those to become hurricanes, one of them a major system. The 30-year average is for the Atlantic to produce 12 storms during the June 1 to November 30 hurricane season. (6/2)