Quote of the Week
““I believe that arctic oil is not for today, and not for tomorrow — maybe for the day after tomorrow,”
Fatih Birol, incoming Director of the IEA
1. Oil and the Global Economy
After some intra-week volatility, New York oil prices were unchanged for the week closing at $44.68. Brent, however, suffered a 3.2 percent weekly loss closing at $47.47. Much of the week’s oil-price action came on Friday after the US Federal Reserve announced on Thursday it was postponing any increase in interest rates. While such an announcement would normally support oil prices by lowering the value of the dollar, the oil markets jumped to the conclusion that the US economy must be in worse condition than is apparent and fell 5 percent in sympathy with the equity markets. A third weekly drop in the rig count did little to stem the tide as traders are getting used to the idea that small changes in the oil-rig count no longer have much impact on production.
There was much discussion in the financial press and on the web last week of the economic woes that are engulfing the global oil industry and the likelihood that there will be little if any recovery within the next year or two. The EIA released a report pointing out the impact the massive debt service US oil producers have accumulated in recent years is having on their cash flow. Last week Samson Resources joined a list of oil producers filing for bankruptcy in an effort to get out from under $4 billion it owes to 10,000 creditors. Only four years ago KKR & Co. and a group of other investors spent $7.2 billion in buying Samson. According to Bloomberg, more than half the companies on its list of oil producers have debts totaling 40 percent or more of their value. Bloomberg also says that 400,000 b/d of oil produced by companies in financial trouble is in risk of being shut down.
Moody’s and Goldman’s were out last week with pessimistic forecasts about the outlook for the oil industry over the next two years. Moody’s says that earnings from the global oil and gas industry will decline by 20 percent this year and only recover modestly in 2016. Goldman’s says the the current crude surplus may keep prices low for the next 15 years and reiterated that it could take prices as low as $20 a barrel to clear the oil glut which is threatening to overrun storage capacity.
The US Secretary of Commerce noted last week that interest in acquiring new drilling rights in the Gulf of Mexico is dropping due to low oil prices. This year the auction of drilling rights in the Western Gulf of Mexico yielded only $22.7 million as compared with $110 million last year. High-cost off shore drilling is in a lot of trouble with participants scrambling to mothball drilling rigs and fleets of support ships and to defer new equipment that was ordered during the boom years.
The only optimistic note last week came from OPEC which is watching the troubles in the US shale industry with satisfaction and is predicting that the world will want more of its oil next year as supply and demand comes back into balance.
A committee of the US House passed a bill lifting the restrictions on US crude exports which are favored by oil producers who hope to get more money for their product and disliked by refiners who might be forced to contend with higher crude costs and lower profits. The bill seems likely to pass the House and move to the Senate where a different dynamic is forming. To overcome a Democratic filibuster, the Republicans may have to make concessions on renewable energy and similar measurers favored by Democrats. The White House has indicated that it does not support the bill in its current form, but there is no word as to whether the President would support a compromise.
Lost in all the furor over oil prices and declining production is that US natural gas production has started to fall. Some of this is due to the drop in natural gas production that comes along with falling oil production, but some is due to the the extremely low price of natural gas which fell on Friday to $2.60 per million BTU’s in NY. These prices have led to an increase in demand for gas by the power companies and the ongoing construction of several export terminals for LNG.
2. The Middle East & North Africa
Iran: On Thursday US Senate Democrats blocked legislation intended to kill the Iran nuclear agreement for the third time. The vote will likely be the last on the issue as the sixty-day review period has expired. and work on implementing the agreement has begun. The Secretary of State has named a career ambassador to lead US efforts to implement the accord.
Before the sanctions are lifted, Iran has to uninstall thousands of centrifuges at its facility at Natanz; convert an underground nuclear site at Fordo into a research facility; and redesign its heavy water reactor at Arak so it cannot produce weapons-grade plutonium. Iran also has to ship its stockpile of enriched uranium abroad, and comply with an International Atomic Energy Agency investigation into its past nuclear weapons work. Over the weekend, the head of the IAEA flew to Tehran to assist the probe into past Iranian efforts to develop nuclear weapons. This of course is a sensitive issue to the Iranians, who vehemently deny they want to build nuclear weapons today, but are more reticent when it comes to discussing past efforts.
The IAEA has until October 15th to report on the status of Iran’s nuclear weapons programs that were begun and possibly ended many years ago.
In the meantime, the Iranians are looking forward to increasing their oil production next year and regaining their former share of the international oil market. Tehran has announced that new types of oil contracts aimed at attracting foreign investment to the country’s oil industry will be announced soon. Trade delegations from France and the UK are scheduled to visit Tehran soon.
Syria/Iraq: Major changes are taking place in the Syrian situation with the arrival of Russian military forces including surface to air missiles and fighter planes at an airfield in northern Syria, and the torrent of Syrian refugees that are trying to make their way into Europe. Moscow says its military personnel are in Syria to help fight ISIL, but many have doubts. More likely is the possibility that recent gains against the Assad government left the Russians with little choice but to step up their military support or see the Assad government collapse. It is clear that now Moscow has brought enough to the table to insure that its client, the Assad government, is part of any settlement.
The scenario of Russian and US warplanes both conducting strikes against ISIL has raised fears of inadvertent confrontations. Talks between the US and Russia on this issue have already started. The current tensions between Washington and Moscow over the Ukrainian situation are only adding to the complexity of the Syrian situation.
The refugee crisis has led to renewed efforts to end the conflict in Syria before millions upon millions of refugees set out for Europe in hopes of finding safety. Life in the refugee camps surrounding Syria is deteriorating as the UN runs out of money to supply food. Given the complexity of the situation and the mutual antipathy among most of the participants in the civil war, the only thing that can be said is that this situation will not be over soon.
Down in Iraq, the government is trying to cope with lower oil prices by increasing exports. The latest plan calls for shipments of Basra crude to increase by 26 percent next month. In the meantime, Baghdad has warned the foreign oil companies working in the country that it will not have much money to pay them for their drilling efforts in the coming year so they should cut back on capital expenditures. ISIL suicide bombers continue to blow up police and civilians in Baghdad. US air strikes continue but are finding few good targets in uninhabited areas where dropping bombs is permissible. There are few signs of progress in a situation that is likely to go on indefinitely. It is difficult to imagine that Iraq can increase oil shipments much more with continuing turmoil, low oil prices, rising temperatures, and shrinking fresh water supplies.
Libya: Efforts by the recognized government in Baida/Tobruk to woo foreign oil buyers away from doing business with Libya Dawn and the legacy National Oil Company in Tripoli have failed. Last week the recognized government held a meeting on Malta hosting 30 organizations that buy Libyan oil. These oil buyers unanimously refused to deal with the Tobruk government’s newly established oil company until a peace treaty between the two governments is signed. Given that Libya Dawn, the coalition of militias that has control of Tripoli, is refusing to come to an agreement, it seems likely that we will not see much change in the situation in the immediate future.
Three of the 2-3,000 members of the Islamic state force occupying Sirte staged an attack on a Libyan Dawn militia headquarters at the only functional airport outside of Tripoli. This airfield, once known as Wheelus Air Base, used to belong to the US Air Force and was the largest US military facility outside of the US. Three members of the Islamic State died in the attack, but the episode shows they are a growing force to reckoned with when they can attack a militia headquarters hundreds of miles away.
On Saturday some 4,500 refugees were rescued from boats off the Libyan coast while trying to get to Italy. The trip is safer now as all refugees have to do is to get 30 or 40 miles off the Libyan coast and stay afloat until they are picked up and transported to Italy by the fleet of ships patrolling the coast.
There is unlikely to be much change in the oil situation unless there is some type of foreign intervention to contain the Islamic State or stop the refugee flow into the Mediterranean.
Saudi Arabia/Yemen: Saudi Airstrikes on Sana picked up over the weekend leading to speculation that a ground assault on the capital is imminent. Complaints are growing about the indiscriminate airstrikes by Saudi and Gulf Arab pilots that are just as likely to hit residences and refugee camps as anything that could be deemed a military target. The US has pledged $89 million in humanitarian assistance to Yemen which is being torn apart by the bombing and fighting.
The Saudis are claiming to have taken in some 2.5 million Syrian refugees, but instead of putting them into camps, they have quietly integrated them into Saudi society complete with jobs, education and health care. This assertion is in response to media claims that the rich Saudis and the other Gulf states have done nothing to help with the refugee crisis. The Saudis are not a signatory to the UN Convention on Refugees, so the UN has no way of verifying Saudi claims.
The Saudis are starting to feel the impact of lower oil prices as the kingdom faces the biggest financial deficit in decades. Steps to cut spending are underway and the privatization of state-owned companies and elimination of fuel subsidies are likely. The Saudis still have about $660 billion in foreign assets, enough to get them through five years of low oil prices.
Recent data shows that the Saudis are holding their own in efforts to maintain market share. In the first half, the Saudis exported an average of 4.4 million b/d to seven Asian nations, about the same as they did before the price slump.
Last week Beijing released historical revisions to its coal production between 2000-2013. The new data shows that energy-content-based coal consumption in China was 14 percent higher than previously reported and that coal production was 7 percent higher. These revisions are certain to have an impact on estimates of China’s CO2 emissions over the past decade. The new data, however, show that China is making a real effort to cut back on coal consumption with increases of only 1 percent in 2012, 2 percent in 2013 and flat in 2014. Coal supplies two thirds of China’s overall energy use.
This week Chinese President Xi Jinping will be in Washington for discussions with President Obama. Among the issues to be discussed is global warming and what the two largest emitters of greenhouse gases can do to bring the situation under control. On the agenda are plans to reduce peak emissions earlier than current plans under which the US is to reduce carbon-dioxide emissions by 26-28 percent by 2025 and China is to reach peak emissions by 2030. Much of the discussion will be aimed at reaching some kind of consensus prior to the climate change conference coming up this December in Paris. As China’s economy slows and the country switches away from heavy industry to consumer services, some believe that more progress on reducing emissions is possible.
When President Putin visited Beijing last week for the WWII victory celebrations, he found out that many of the projects he had been counting on to increase trade between the two countries have been placed on hold due to the economic crisis in China. Moscow had been counting on this “shift to the east” to offset the impact of reduced trade with the West due to the Ukrainian situation.
Russia’s economy continues to deteriorate. Moscow’s labor minister said that real incomes in Russia are expected to contract by 5 percent this year. Efforts to ramp up domestic substitutes for food and goods previously imported from the West are going slowly and it may be years before they are implemented. To offset growing budget deficits, the government is studying an increased oil extraction tax that could increase the tax burden on oil producers by $9 billion. Given the shape of the Russian economy, there is little left to tax other than oil production which is still doing well thanks to the greatly devalued ruble and large export sales which have combined to leave oil export revenues largely unchanged when measured in rubles.
Work on the “Turkish Stream” pipeline which Moscow is planning to build to move natural gas to the EU while bypassing Ukraine has not begun. Delays have moved completion of the project into 2017.
5. The Briefs
A global trade slump? Exports and imports of goods are lagging far behind the pace during past expansions, threatening future productivity and living standards. For the third year in a row, the rate of growth in global trade is set to trail the already sluggish expansion of the world economy, according to data from the World Trade Organization. (9/15)
Mexico will require royalty payments of 30 to 36 percent for companies that win rights to produce oil in the nine shallow-water fields up for auction this month. The announcement of the minimum financial requirements prior to the awarding of the contracts is one of several adjustments made by the Mexican government to attract more bids than in July, when only two of 14 blocks were awarded to private companies. (9/15)
Refinery constraints: As commercial stockpiles grow, an increasing proportion of US crude oil stocks is held in off-site tank farms, some owned or leased by refiners themselves, but many owned or leased by marketers and traders. Operational requirements prevent refineries filling on-site storage facilities to their maximum capacity. (9/15)
Gulf of Mexico: The US government said it was offering more than 40 million acres for drilling opportunities in the central and eastern Gulf of Mexico. The auction is scheduled for March 2016 and will open an area containing an estimated 894 million barrels of oil. (9/15)
California’s severe drought has now been going on for four years. After studying tree rings, scientists say that its been 500 years since it has been this dry in the state. (9/15)
North Dakota is considering allowing drillers to temporarily abandon wells that have been drilled but not yet fracked. Under current rules, drillers must complete wells within one year after they are drilled. There are currently some 900 wells that are awaiting completion. Lifting the requirement that they be drilled within the next year lifts a major financial strain off the drillers. (9/15)
Natural gas production from the seven largest US shale deposits will drop for a fourth straight month in October to average 44.784 billion cubic feet a day, the lowest since March. The pullback follows a decade of surging gas production that created a glut of the heating fuel and sent prices plunging to record lows in some regions. The biggest declines forecast for October are in oil-rich deposits such as the Eagle Ford shale formation in Texas. (9/15)
Indonesia will rejoin OPEC in December. It originally left due to a slide in its oil output, as it couldn’t overcome the declining production from legacy fields. Its current daily output of 870,000 barrels is just half of what it was in its peak in the late 1970s. The country hopes to be a “bridge” between oil producing nations and consuming countries and wants to gain some influence on policy decisions (9/14)
China’s diesel exports may surge to a record in the coming months as refinery output increases while domestic demand growth for the fuel slows. The nation’s diesel shipments might have risen to a record last month, topping the previous high in June of 670,000 tons, and may climb to 1 million tons a month in the fourth quarter. (9/14)
The world is starting to heat up again, say British scientists, raising concerns that a 15-year slowdown in the rate of global warming could be coming to an end. A pause in the rate of global temperature rises since the late 1990s has baffled climate scientists and led some to question whether man-made climate change was a serious problem. (9/14)
Uganda/Kenya: Low crude prices have thrown the future of East African oil projects into doubt. With oil prices languishing below $50 a barrel, there’s little incentive for companies such as Tullow Oil Plc, Africa Oil Corp., China’s CNOOC Ltd. and France’s Total SA to keep investing. (9/16)
Offshore safety rules: Republican lawmakers on Tuesday criticized an Obama administration move to toughen standards for offshore drilling, saying the new rules would be costly for drillers and threaten to shut down oil and gas exploration off the nation’s coasts. The Interior Department is preparing to issue standards to close what it says are gaps in blowout preventer rules. (9/16)
Gasoline consumption: U.S. motor gasoline use has been rising after reaching an 11-year low in 2012. Although lower gasoline prices have been an important factor in the increase in gasoline use so far in 2015, changes in the labor market and in the vehicle sales mix over the past few years also have contributed to the rise in gasoline use. (9/16)
Offshore drilling: The offshore drilling industry will remain under severe distress through 2017, predicts Moody’s Investors Service. Most troubling for the industry is overcapacity, as the number of idle rigs climbs and as newbuild deliveries loom over the market. Drillers will increasingly contend with diminished backlogs, rig values, fleet sizes, and margins if oil prices do not bounce back to the $70-80 range. (9/16)
Drilling in Texas: The issuance of new drilling permits has dropped off dramatically in the last 12 months, according to numbers from the Texas Railroad Commission. Drilling permits declined 65 percent year-over-year in August 2015 to 864. Total well completions for 2015 year to date are 14,665, down from 20,657 recorded during the same period in 2014. (9/16)
Drilling in the Gulf: Low oil and gas prices have lessened pressure from producers for the Obama administration to expand the plays it plans to offer in its five-year plan for offshore leasing. That US Western Gulf sale yielded total high bids of $22.7 million, the smallest Western sale in over 30 years and just 20% of the $110 million yielded in last year’s comparable sale. (9/16)
Development of the Turkish Stream natural gas pipeline from Russia is on hold because of installation delays, an official with Russia’s Gazprom said. The late 2016 launch of the pipeline through Turkey is no longer achievable. (9/16)
Nigerian companies are finding it increasingly hard to get hold of foreign currency due to central bank restrictions and may struggle to repay their debts. (9/17)
Offshore Nigeria: A subsidiary of ExxonMobil Corp. has started oil production ahead of schedule at the Erha North Phase 2 project 60 miles offshore Nigeria. Peak production from the expansion is estimated at 65,000 b/d, increasing total field production to 90,000 b/d. (9/17)
China’s coal: New preliminary data from the China Statistical Abstract 2015 show an upward revision to China’s historical coal consumption and production. Energy-content-based coal consumption from 2000 to 2013 is up to 14% higher than previously reported, while coal production is up to 7% higher. These revisions also affect China’s total primary energy consumption and production, which are also higher than previously reported—up to 11% and 7% in some years. (9/17)
Low oil prices: A glut of crude may keep oil prices low for the next 15 years, according to Goldman Sachs. Goldman cut its crude forecasts earlier this month, saying the global surplus of oil is bigger than it previously thought and that failure to reduce production fast enough may require prices to fall near $20 a barrel to clear the glut. Goldman’s long-term forecast for crude is at $50 a barrel. (9/17)
Bankruptcies: Oil and gas driller Samson Resources Corp. filed for bankruptcy in Delaware Wednesday night, undone by a collapse in energy prices and billions in debt that KKR & Co. and other investors piled on to fund a 2011 takeover. Samson’s filing is among the biggest energy bankruptcies in the U.S. this year, but it probably won’t be the last. The shale-oil driller is, in a way, a victim of its own success. (9/17)
Mediterranean gas: A natural gas discovery off the Egyptian coast and recent cooperation with Cyprus could translate to European energy security, Italian energy company Eni said. (9/17)
Norway: The low price of crude oil has led to clear downturns in the Norwegian economy and that pressure should persist, government data show. Crude oil prices are down more than 50 percent from last year, forcing many energy companies to cut back on spending. In many basins, that means less overall production. (9/17)
OPEC is assuming the oil price will rise gradually to $80 a barrel in 2020 as supply growth outside the group weakens, a slower recovery than several member nations have said they need. The average selling price of the Organization of Petroleum Exporting Countries’ crude will increase by about $5 annually to 2020 from $55 this year. (9/18)
Nigerian states have drawn from a $1.5 billion emergency fund at the central bank and are asking for more money as they struggle to pay civil service salaries after the oil-price slump. At least half of Nigeria’s 36 states, which rely on monthly federal handouts for the majority of their funding, have been unable to pay state employees after Brent crude prices fell. (9/18)
China’s slowdown is rippling across Africa and the Republic of the Congo, Angola, and Mauritania are the most exposed, relying on demand from the Asian economy for almost half their exports. Oil accounts for the bulk of Angola’s and Congo’s exports, damaging their prospects after crude prices plunged 55 percent. (9/18)
China’s restrictions on highly polluting types of coal, introduced earlier this year as part of an accelerating campaign to clean up its air, have added to a significant glut in the global market for the fuel, an executive of BHP Billiton said on Friday. Coal prices have been tumbling since 2011 as cooling demand for the fuel was met by rising supplies from new mines planned when the market was booming. (9/18)
Canadian natural gas exports to the United States for the seven years ending in 2014 are down significantly because of US shale gas production, a regulator said. For the eastern United States, exports are down more than 65 percent for the seven years ending 2014 and for the US Midwest, down nearly 23 percent through 2014. (9/18)
Statoil announced Thursday that the world’s first subsea gas compression plant is now online at the Åsgard field in the Norwegian Sea. The recovery from the Midgard reservoir on Åsgard will increase from 67 percent to 87 percent, while recovery from the Mikkel reservoir will improve from 59 percent to 84 percent, as a result of the new facility. The overall effect will be to add some 306 million barrels of oil equivalent to the total output of Åsgard during the field’s life. (9/18)
Nigeria will seek to renegotiate the fiscal terms of existing production-sharing contracts with some international oil and gas companies to seek more favorable terms, the new head of the Nigerian National Petroleum Corp. said. (9/19)
Volkswagen: US and California environmental regulators on Friday accused Volkswagen AG of deliberately circumventing clean air rules on nearly 500,000 diesel cars and the company could face penalties of up to $18 billion. (9/19)
Exxon Mobil is meeting with small, closely held producers in the Permian Basin to negotiate possible purchases and joint ventures. The company is expanding its use of a new strategy that offers operators a cut of future proceeds rather than big upfront stock or cash payouts. (9/18)
Natural Gas: Record levels for production, power burn and storage injection will make 2015 a record year for natural gas, Jeff Moore, senior energy analyst at Platts told attendees at the 38th annual Coal Marketing Days. While coal plant retirements have helped fuel an increase in natural gas generation, the real driver behind in the rise in demand is the commodity’s continued low price. (9/18)