1. Oil and the Global Economy
After much volatility last week prompted by the Ukrainian situation, oil prices fell on Thursday and Friday to close at $93.29 on NY and $100.82 in London. The Ukrainian partial-ceasefire, lower than expected US jobs growth and well-supplied crude markets were responsible for the decline last week. Crude prices have now fallen by some $12-14 a barrel since late June and many analysts are talking of further declines. Demand is perceived as weak in the US , Europe, and China; the threat to oil supplies related to the Ukrainian and Middle Eastern situations are now seen as much lower than earlier in the year; and we are entering two months of refinery maintenance when the demand for crude will be lower. Last week’s US stocks report showed little change in production, imports, and inventories.
US gasoline prices continue to fall with the end of the summer driving season. The AAA says the national average for regular is now down to $3.44 and a further 20 cent fall is expected in the next two months with some areas of the country experiencing sub-$3 gasoline. The US automobile industry is reporting that sales of electric and hybrid vehicles have slumped and SUV’s are doing well as is normal in times of “cheaper” gasoline.
Last week a US federal judge ruled that BP had indeed acted with gross negligence and willful misconduct leading up to the 2010 Deepwater Horizon disaster. This ruling opens BP to a potential government fine of some $18 billion on top of the $28 billion the company has already paid out for damage claims and cleanup costs. While analysts are saying that BP has enough resources to handle a fine of this magnitude in the long run, the $50 billion cost of the spill is clearly going to give oil companies second thoughts before launching risky new drilling ventures, particularly in the US and Canadian arctic where oil spills will be difficult to contain, and penalties for damaging the environment are likely to be heavy.
The new CEO of Royal Dutch Shell made an unusual admission last week when he said publicly that the company’s returns are too low. Shell no longer has sufficient crude production or lucrative prospects to exploit so that the only solution may be to shrink the company. The same problems are facing several other international oil companies so that we may see a much smaller oil industry ten years from now. This, of course, is exactly what those who understand peak oil have been expecting for many years.
Natural gas futures had a mostly quiet week trading around $3.85 per million BTU’s after having fallen 20 cents on Monday. US natural gas inventories are still about 15 percent below the five-year average for this time of year and are unlikely to increase very much before the winter heating season begins in October. It is worth noting that some meteorologists are already seeing signs that the polar vortex could return to the northern hemisphere this winter. Some are saying that colder winters could be the result of the melting of the polar icecap.
If temperatures are anything like last winter US natural gas reserves will see larger than usual drawdowns and will be starting from a lower base. Large scale LNG exports are still a year or so away, but new pipelines to Mexico are rapidly increasing US natural gas exports. Some are saying that these exports could be as high as 4-5 billion cubic feet per day by 2018. A combination of pipeline and LNG exports, coupled with the increased use of natural gas to replace coal in US power plants and colder winters, may be too much even for the Marcellus shale gas boom to cope with.
2. The Middle East & North Africa
Iraq: Oil exports from southern Iraq and Kurdistan are looking more secure as the US and the coalitions it is building are preparing to move against the IS by providing increased air support, which as we have seen can be highly effective in desert warfare, and increased logistic and intelligence support to selected groups who are expected to do the ground fighting. Given such a massive outside intervention, even with minimal foreign boots on the ground, Iraqi oil exports look secure unless some unexpected geopolitical upheaval sends the situation careening off in a new direction.
With heavy fighting and IS occupation of many areas north of Baghdad, Iraq’s oil exports dropped in August to 2.3 million b/d with no oil coming from the Kirkuk region or the roads to Jordan being blocked. In the midst of the enormous pressures from the IS, Baghdad signed a new agreement with BP relating to the Rumaila oil field. The 2016 production target for Rumaila has been reduced to 2.1 million b/d from the unrealistic 2.85 million goal that was contained in the 2005 agreement. In the last nine years BP has been able to increase Rumaila’s production from less than 1 million b/d to the current 1.3 million.
Kurdish oil production seems to be safe for now and foreign oil workers are returning to their jobs after the IS scare of a few weeks ago. Companies working in the Kurdish fields say all is going well. If the Kurds end up in control of the northern Iraqi oilfields, the province’s production could climb rapidly, but the situation is still too fluid to make a forecast.
The overall Middle Eastern situation is becoming increasingly bizarre with the US and its allies entering the fight against the IS, who are Sunnis, on behalf of the Kurds and the Shiites who are supported by Tehran and Assad in Syria. For now the oil exports seems safe, but the increasing animosities and atrocities engendered by the Sunni/Shiite conflict could easily engulf the region in years to come.
Libya: Despite pledges by the groups that control the export terminals that they will work to ensure that exports resume, very little oil seems to be making its way from the country. The Islamist militias that took over Tripoli two weeks ago have seized the oil ministry and with few Western embassies or reporters left in the country there is little news. According to the Egyptians, there are some 1,600 armed groups with millions of modern weapons running around in Libya. Disarming this mob would be nearly impossible without massive foreign intervention. At this juncture no foreign power shows the slightest interest in getting involved. The only possibilities are Egypt and Algeria which are the countries directly threatened by an Islamist takeover of Libya which could turn into an oil rich jihadist support base.
Unless there is a de facto partition and the government in Tobruk can gain control of the eastern oil fields, it seems safe to assume there will be little or no oil coming out of Libya for the immediate future
Iran: Tehran and Washington began another round of bilateral talks in Geneva last week aimed at reaching an agreement on the nuclear issue. UN inspectors have been given unusual access to a secret plant where Iran is developing new centrifuges for enriching uranium; however the IAEA is receiving little cooperation in its efforts to get at the heart of Tehran’s alleged efforts to build nuclear weapons.
The battle against the IS in Iraq and Syria is forcing Iran into closer cooperation with the US although both sides deny this. There have even been reports, officially denied, that the Ayatollah Khamenei has authorized his military to coordinate action against the IS with the US. How all this plays out is simply too complex to predict. For now the sanctions on Iran remain in place and are being strengthened while Tehran is showing no inclination to come clean on its efforts to build nuclear weapons or to give iron-clad assurances that it does not have a nuclear weapons program underway.
Egypt: The long-awaited failure of Egypt’s electricity grid took place on Thursday when half the country’s power was shut and its economy ground to a halt. Although the immediate problem was fixed after six hours, the rolling blackouts brought on by fuel shortages continue. Egypt’s power problems stem from many years of inattention to an aging grid, insufficient oil and gas to fire the nations power plants, and, recently, reports that sub-standard fuel is leading to breakdowns in power plants. Over the weekend, there were major protest rallies across the country and a speech by the nation’s president who urged patience and warned that it will take five years and $12 billion to bring electricity production to the point where the rolling blackouts can be eliminated.
Despite the Army takeover, the situation in Egypt is far from stable. Former President Morsi is now facing the death penalty for giving state secrets to Qatar. Morsi was brought down in part by riots stemming from power shortages. The IS in Syria says it has been giving advice to insurgents operating in the Sinai on how to hurt Cairo. For the West, the major issue is the Suez Canal and whether the situation will deteriorate to the point where the canal and the accompanying pipeline can no longer move oil to Europe. Moreover, should the largest state in the Middle East collapse in turmoil such as has happened Syria, Libya, Yemen, Sudan, and Iraq, the repercussions are bound to affect regional oil exports.
The ceasefire agreed on last week was broken over the weekend when shelling was resumed on Sunday. The war of words between Russia and the EU continues. The EU says the sanctions it will announce this week would be suspended if Moscow pulls its troops out of Ukraine, and Moscow warns of retaliation if new sanctions are imposed. It does not appear that for now the new round of sanctions or Moscow’s retaliation will involve oil and gas exports. The situation is unlike to go away or come to a satisfactory solution in the near term. It remains dangerous despite the complacency of the oil markets.
4. Quote of the Week
"During the last two centuries we have known nothing but an exponential growth culture, a culture so dependent upon the continuance of exponential growth for its stability that is incapable of reckoning with problems of non-growth."
— Marion King Hubbert
5. The Briefs
- A senior commander from the Sinai-based Ansar Bayt al-Maqdis, which has killed hundreds of members of the Egyptian security forces over the last year, said Islamic State has provided instructions on how to operate more effectively. . “They don’t give us weapons or fighters. But they teach us how to create secret cells, consisting of five people.” (9/6)
- Ghana will double crude production by 2017 as offshore deposits being developed by Tullow Oil Plc and Eni SpA start producing oil. Ghana and partners Tullow and Anadarko Petroleum Corp. plan to invest $20 billion in the next 10 years to develop offshore oil deposits.(9/6)
- Shell will trim its project in Sichuan province because of geological challenges and the area’s dense population. “In Sichuan progress has been slower and more difficult than we might have hoped: partly for geological reasons, partly by some of the challenges of operating in the very highly populated agricultural region,” Shell now plans to focus chiefly on the development of the Changbei tight gas field in the Shaanxi region but China may miss its 2020 target for shale-gas production. (9/6)
- North Dakota officials and other those from other upper Midwestern states urged US regulators to put pressure on railroads to fix issues that are blocking grain shipments. The culprit some believe is the oil & gas industry – in August, approximately 60% of oil produced in North Dakota was transported out of the state by rail, and some argue the railroads are favoring oil companies over agriculture. (9/6)
- Enterprise Products Partners said it’s soliciting interest in a pipeline that would service North Dakota and Colorado shale oil basins. Dubbed the Bakken-to-Cushing pipeline, Enterprise said the line could carry an initial 340,000 barrels per day and expand to 700,000 bpd. The pipeline would extend about 1,200 miles. (9/6)
- The US drilling rig count gained 11 units to reach 1,925 rigs working during the week ended Sept. 5, Land rigs were up 9 units to 1,847 while rigs drilling in inland waters were up 3 units to 13. Offshore rigs edged down a unit to 65. Canada’s rig count increased 5 units to 414, giving the country 25 more units compared with this week a year ago.(9/6)
- How much oil and gas is left in the North Sea? The correct answer for official proved+probable reserves is between 8 and 9 billion boe, a figure that both DECC and Oil and Gas UK agree on. In 2013, the direct tax take from oil and gas production for the whole of the UK was £4.67 billion and falling – less than 7 percent of the costs of running Scotland. (9/6)
- Israel signed a letter with the National Electric Power Co. of Jordan for the supply of 45 billion cubic meters [1.6 trillion cubic feet] over a period of 15 years. (9/5)
- Roughly half of China’s imported oil now comes from the Persian Gulf, whereas America’s reliance on Middle Eastern crude has been steadily shrinking in recent years. (9/5)
- Nova Scotia Energy Minister Younger said he had legislation prepared to prohibit hydraulic fracturing at inland shale basins. “Nova Scotians have overwhelmingly expressed concern about allowing high volume hydraulic fracturing to be a part of onshore shale development in this province at this time.” (9/5)
- Saudi Arabia is losing ground as the shale boom leaves U.S. refiners with ample supplies of inexpensive domestic oil. The US imported 878,000 barrels of Saudi crude a day in the first four weeks of August, the least since 2009. (9/5)
- The IMF said it approved a $552.9 million credit to Yemen to help the country maintain a level of economic stability. Militant attacks on oil facilities in Yemen are hurting the country’s ability to build a strong economic base, the International Monetary Fund said. (9/4)
- In recent weeks Venezuela hinted it was considering controversial steps to ease a deepening economic crisis, including raising the price of gasoline. But on Tuesday, in a widely anticipated address, President Nicolás Maduro didn’t unveil any major economic adjustments. Instead, the president announced a cabinet shake-up that removed Rafael Ramírez, the powerful oil minister, who was seen as a proponent of modest changes. (9/6)
- Indian Prime Minister Modi is closer to scrapping controls on diesel prices that led to $66 billion of losses on sales of the fuel in the past decade. The loss has fallen to 0.08 rupees (less than 1 U.S. cent) a liter from 13.4 rupees in September last year after Modi continued with gradual price increases that began in January 2013. The ministry will seek Cabinet approval to remove diesel controls once losses end. The government and state-run crude producer Oil & Natural Gas Corp. bore the brunt of the 4 trillion-rupee cost of cushioning diesel in the last 10 years. (9/4)
- Royal Dutch Shell has made a natural gas discovery within the Utica shale in Tioga County, Pa. The discovery extends the “sweet spot” of the Utica formation beyond southeast Ohio and western Pennsylvania, where previous discoveries have been located, and into an area where Shell holds a major leasehold position of 430,000 acres. (9/4)
- Britain’s energy shortage grew when EDF Energy warned that four nuclear reactors it had shut down for safety reasons might be out of action until the end of the year, two and a half months longer than expected. The National Grid said it was seeking emergency electricity supplies because of shortages triggered partly by the shutdown of the nuclear plants. (9/4)
- Water shortages will limit shale gas development, especially in China. If the entire world’s theoretically recoverable shale gas could be developed, our supply of natural gas would expand 47 percent—lowering both greenhouse gas emissions and energy prices, according to estimates from the Washington-based World Resources Institute. A report from WRI, “Global Shale Gas Development: Water Availability and Business Risks,” released on Tuesday, shows that roughly 38 percent of the world’s shale gas and oil lies buried beneath water-stressed regions. (9/4)
- Bolstered by $35.3 billion in refined petroleum and coal product exports, the Houston metropolitan area shipped the most goods to foreign markets of any US metro region, the US Commerce Department saidTuesday. Overall, the Houston area exported $115 billion of goods in 2013, the most of any region for the second year in a row after it exported $110.3 billion in 2012. (9/3)
- Dominion , Duke Energy , Piedmont Natural Gas , and AGL Resources have formed a joint venture to build and own the proposed 1.5-bcfd Atlantic Coast Pipeline. The 550-mile natural gas pipeline would move Marcellus and Utica shale gas from Harrison County, W.Va., southeast through Virginia, with an extension to Chesapeake, Va., and then south through central North Carolina to Robeson County. (9/3)
- Last July the EIA quietly revealed that 127 of the world’s largest oil and gas companies are running out of cash. They are now spending more than they are earning. Profits have lagged as expenditures have risen. (9/1)