Peak Oil Review - Oct 12
Quote of the Week
“China was always seen as the kind of wonder market that was going to grow and need so much LNG that people got somewhat carried away.” Chinese LNG imports are down 3.5% this year, compared with a 10% rise in 2014.
Howard Rogers with the Oxford Institute for Energy Studies and a former gas executive at BP
1. Oil and the Global Economy
Oil prices surged last week with NY futures trading above $50 a barrel for the first time since July before settling on Friday to close at $49.63, the biggest weekly rise in six years. London oil futures closed Friday at $52.65, up 9.4 percent for the week. The move was prompted by the falling US rig count which has many traders convinced that US production will fall much further; a weaker US dollar prompted by a lack of Federal Reserve movement to increase interest rates; and stepped up Russian involvement in the Middle East which is likely to prolong turmoil in the region. There continues to be disagreement among analysts as to whether last week’s move will send oil prices to higher trading ranges, or is simply a repeat of last August when prices surged $10 a barrel only to fall off in a week or so. While the US rig count continued to drop last week most other indicators suggest the markets will be weaker in the immediate future so that the week’s surge was simply a case of “hot money” chasing headlines. US crude and gasoline stocks continued to grow the week before last, and Goldman Sachs remains adamant that this oil rally is not going to last.
Goldman’s sees the rally as partly due to short covering and the triggering of technical “buy” signals. The firm insists that the oil markets are still oversupplied and the glut is being sustained by production outside the US so that the 600,000 b/d drop in US production this summer is still not sufficient to move prices significantly higher. The failure of the Federal Reserve to increase interest rates shows an underlying weakness in the global and US economies which does not support increasing oil demand. There is also a school of thought that says the Federal Reserve’s failure to increase interest rates is partially motivated by concerns that higher rates would lead to the collapse of many marginal oil producers in the US. Goldman Sachs also sees a further drop in prices as US storage tanks fill to working capacity this winter. Last week there was a report of preparations to store distillates on tankers along the east coast due to lack of onshore storage.
The other side of the debate holds that the the global overproduction is not as bad as has been portrayed and that supply and demand will be back in balance much sooner than the markets are anticipating. Industry leaders and OPEC officials continue to talk of prices rising next year, but these are hardly disinterested observers.
There is general agreement, however, that US production will continue to fall unless prices rebound substantially. Delegates to the Oil and Money conference in London, an annual gathering of the world’s oil executives, said that prices are too low to support shale oil production which will continue to contract. Some are talking of a much larger decline in US shale oil production than the EIA currently foresees bordering on collapse of the industry. OPEC estimates that investment in oil and gas projects will fall by 22 percent this year which is sure to lead to higher prices in the long run.
Overshadowing the intricacies of the oil markets are reports from the IMF which met in Lima last week. These warn of the possibility of a major global economic slowdown and call for central banks to maintain low interest rates to prevent a massive global default which could wipe 3 percent off global GDP growth and lower the demand for oil considerably.
2. The Middle East & North Africa
Iran: The nuclear agreement that would lift sanctions on Iranian oil exports next year seems solidly in place. On Sunday, the Iranian parliament approved the “outline” of the nuclear deal and final approval is expected later this week so there would seem to be little to stop the deal from going through. However, Tehran has been taking actions that are aggravating relations with the West by injecting itself ever deeper into the Syrian conflict. Although there is yet no indication that regular Iranian troops have been involved in the recent offensive in western Syria, the death of the senior Iranian advisor outside Aleppo shows once again that Tehran is deeply involved in the fighting. People tracking Iran’s involvement in Syria say that some 60-70 Iranians have been killed in the fighting this year.
Much of the fighting is being led by members of the Lebanese Hezbollah who are desperate to maintain a Shiite-controlled supply line through Syria to maintain their confrontation with Israel. Should Sunni rebels take over from the Assad government, Hezbollah would be in such serious difficulty that it seems willing to suffer heavy casualties to maintain Assad in power. There are also reports that Tehran has organized a force of “volunteer” Afghani Shiites who have been living in Iran, and sent them to fight for Assad.
Last week Washington reminded foreign governments that the sanctions on Iran are still in place and that a rush by Western companies to invest in Iran’s oil industry is premature. Tehran’s announcement on Sunday that it has convicted a Washington Post reporter on what are likely trumped-up charges of espionage shows that Tehran has enough confidence in its position in the wake of the nuclear agreement to confront Washington directly.
There are reports that Iran’s oil exports will hit a seven-month low in October despite much price cutting to boost sales. This is likely due to efforts by the Gulf Arabs and Iraq to maintain market share at Iran’s expense. The IMF reported last week that Iran’s economy will grow very little next year because of low oil prices and that it will be 2017 before the lifting of the sanctions will have a major impact. The battle for markets and a slowing global economy may have more impact on Iran’s economy than has been generally appreciated.
Syria/Iraq: The battle for Aleppo is shaping up as a defining event in the course of the civil war. Intensified Russian airstrikes against non-ISIL forces west of Aleppo have forced the insurgents back as government forces led by Hezbollah and other Shiite militia units are making progress towards the city. In the meantime, ISIL, which is relatively unscathed by the heavy Russian bombing, is also making progress in moving against the non-ISIL rebels in the area. The situation was further complicated by a suicide bombing -- likely by ISIL -- in Ankara over the weekend which killed some 128 demonstrators at a peace rally and has the Turkish government in an outrage.
For now, conventional wisdom is saying that Moscow and Tehran have scored a major victory over the West by their stepped up intervention in Syria and early success in driving back rebel forces. There is little doubt that the Assad government has been saved for the time being, but at the cost of prolonging the war indefinitely, destroying what remains of Syria’s economy and sending thousands more into refuge camps and exile. Keep in mind that Moscow and Tehran are paying most of the bills that keep the Assad government functioning – a cost that neither can really afford. However, while Russian airpower and more Iranian support may lead to gains in the short term, the situation continues to deteriorate as the bombing in Turkey over the weekend shows.
Troubles are growing in Iraqi Kurdistan where a series of strikes took place last week protesting the lack of payments from the impoverished Kurdish government. The demonstrations are the worst in memory. Erbil has been unable to make up for the loss of revenue from Baghdad, which is also broke, by selling oil from its territory and the northern Iraqi oilfields that it controls. The region is beset with 3 million refugees from the fighting with ISIL in Syria and Iraq.
In an agreement with Baghdad, Erbil agreed to contribute 550,000 b/d to Iraq’s oil sales in return for reinstatement of the payments from the national budget. So far the Kurds have only received a small part of what they are due. A record 620,000 b/d were exported from the province in September, but many are questioning just how much is being received from these exports and how the money is being used.
Libya: Last week there were reports that the Zueitina oil export terminal had reopened after a five-month dispute with an oil workers’ union. Libyan oil production is now thought to be about 350,000 b/d, but at least 100,000 b/d is going to domestic consumption.
Saudi Arabia/Yemen: After six months, the war in Yemen goes on with Saudi airstrikes continuing as government forces and foreign allies push towards Sanaa. As in other war zones, the flow of refugees arriving in Djibouti, Ethiopia, Somalia, and Sudan continues to increase. The UN says the total could reach 200,000 by next year as the fighting seems likely to continue indefinitely.
Saudi oil production in September was down about 60,000 b/d from August as the kingdom produced 10.22 million b/d last month. Exports were up a bit as the summer demand for electricity to power air conditioning is slackening. Saudi sources say production will remain about the same in the 4th quarter with some increases in exports as domestic demand decreases in the winter.
Concerns are increasing as to the stability of the Saudi government over the long run. Oil exports have been drifting down over the last decade at a rate of about 1.4 percent a year as increasing domestic demand eats away at oil revenue. Increased involvement abroad in the Yemen and Syrian conflicts is causing a strain on the budget not to mention oil revenues which are down 50 percent in the past year or so. Foreign exchange reserves have been falling for the 7th month in a row and have now reached $654 billion. These assets have now fallen by $82.5 billion since reaching a peak of $737 billion last August. The government’s budget deficit likely will widen to 20 percent of GDP this year.
The IMF left its predictions about the course of China’s economy unchanged last week saying it will grow 6.8 percent this year and 6.3 percent in 2016. Beijing claims its economy grew by 7 percent in the first half, but many outside observers are far more pessimistic than the IMF saying the growth is now likely below 6 percent.
Despite lower GDP growth, China’s demand for oil grew by 10 percent year-over-year to 11.19 million b/d in August according to a new Platts analysis of government data. Refinery input in August grew by 6.5 percent year-over-year, and net imports of oil products surged 131 percent to 700,000 b/d in August. During the first eight months of this year China’s apparent oil demand was up 8.2 percent from the same period in 2014. Platts expects China’s demand for oil to remain steady for the rest of the year, but that the overall growth for 2015 could slide to 5 percent due to the high base established in the last quarter of 2014.
With the fall of oil prices last year, China began to purchase cheap crude for its strategic reserves beyond what was required for its domestic economy. The completion of large new oil refineries also added to the demand but at least some of the refined products from the new refineries are intended for export. It may be a while before the situation is clarified. China’s economy is slowing and the demand for oil should be going down along with it. The addition of many new cars to China’s automobile fleet in recent years has added to the demand for gasoline with apparent demand in the first eight months of this year increasing 11.4 percent to 2.69 million b/d. Some believe that the increased use of motor vehicles is keeping the demand for oil relatively high.
With Russia’s stepped up efforts in Syria, the Ukrainian situation has moved to the back burner. The Minsk II ceasefire is still more or less holding and heavy weapons have been moved back from the front lines. However, Moscow continues to keep pressure on Ukrainian forces with small arms fire and periodic skirmishes. While the Ukrainians say they expect a renewed Russian offensive at any minute, Moscow is likely to be distracted with its Syrian venture for the time being.
The reasons for Western sanctions on Moscow remain in place and it is unlikely that there will be any change in the immediate future. Given the, at least temporary, success of Moscow’s policies in Ukraine and Syria, it is unlikely there will be much change until until economic conditions force the Russian government to reconsider.
The ruble has been highly volatile of late fluctuating with oil prices. Moscow continues to suffer from low oil revenue and is rapidly running through its reserve funds to support the ruble and to pay off large Western loans that are falling due. At current rates of spending, Moscow’s reserves will last only until 2017-2018. Unless there is a major spike in oil prices, the Russians will then be under increasing pressure to negotiate their way out of the sanctions which are stifling its industrial development and economic growth.
While Russia says its oil production reached a new post-Soviet high of 10.74 million b/d in September, some observer have long been skeptical of the production numbers that Moscow announces, as they are 500,000 b/d higher than what the EIA gives for Russia’s production. The answer to this may be that Moscow has been lumping in oil that Russian owned companies have been producing outside of Russian territory such as in Iraq into their total production. As no other country attempts to take credit for oil produced elsewhere, Moscow seems to be playing a game to enhance its prestige.
There are going to be many long range ramifications to Moscow’s efforts to keep the Assad government in power. The shock power of a large, unexpected, and probably indiscriminate bombing campaign against the rebel forces confronting Assad is currently showing gains. However, the Assad government does not have the military capability, even in conjunction with Iranian support and Hezbollah militias, to suppress the numerous groups that are opposing it. As Washington has already found out the situation in Syria and Iraq is a quagmire that will only get worse with passing time and will likely continue for decades. Before all this is settled, outside forces such as global warming and the depletion of natural resources are likely to bring many changes to the region.
5. The Briefs
In the North Sea, the economic dilemma facing operators – the high proportion of aging assets, whose lifespans have already been extended many years beyond what was originally intended – is further complicating an already-difficult question for operators: whether to continue to invest in life extension or to begin the painful process of decommissioning? (10/9)
In Norway, an economic slowdown is forcing the government to dip into its vast oil savings for the first time as it cuts taxes in an attempt to boost faltering growth and accelerate its economic transformation. After buoying Norway’s sovereign wealth fund for almost two decades, oil revenues will start to trickle out. (10/8)
Hungary has increased oil imports from Iraq’s Kurdistan region at the expense of Russian crude in a sign that Middle East producers could be gaining ground in a battle with Moscow for global market share. (10/8)
The twin Nord Stream pipeline, running from Russia through the Baltic Sea to Germany, will have enough gas to fulfill plans to expand the existing infrastructure, according to Gazprom. Other players include German energy companies BASF and E.ON, French company ENGIE, Austria’s OMV and Royal Dutch Shell. (10/7)
In the European Union, energy traders are at odds with new rules designed to halt speculation in commodities, arguing that companies won’t be able to efficiently manage risk and market volatility could in fact cause spikes. (10/6)
Diesel glut: Oil traders are preparing to store diesel in tankers off the coasts of northern Europe and New York as land storage tanks are nearly full, traders said on Friday. Tank capacity levels are above 70 percent in some cases, levels considered near maximum, according to traders. (10/10)
The CEOs of Royal Dutch Shell and ExxonMobil laid out contrasting visions this week for reducing fossil-fuel emissions, illustrating a divide between American and European energy companies ahead of a United Nations climate-change summit. Exxon-Mobil’s Rex Tillerson said Wednesday that innovation, free markets and competition were the best tools for curbing emissions. One day prior, Shell’s Ben van Beurden said technology wouldn’t be enough to bring about emissions cuts, and that governments needed to step in. (10/8)
In the UK, Rolls-Royce Holdings said it will cut another 400 jobs at its marine-engines arm as the oil-price decline continues to weigh on demand for the offshore vessels that the business uses. The cuts announced Monday follow the elimination of 600 factory posts at the division announced in May. (10/5)
OPEC Secretary General Abdalla el-Badri said he is concerned about the impact of low oil prices on investment and the consequences for future supply, but insisted that rebalancing world oil markets was the responsibility of all producers and not a burden to be borne by OPEC alone. Badri also predicted that oil prices would rise from current six-year lows of below $50/b in the next few months. (10/7)
The UAE is continuing to invest in its oil and gas development plans despite lower oil prices, and is on track to meet its 2017 production capacity aims, Energy Minister Suhail al-Mazrouei said Sunday. Oil production capacity will expand to 3.5 million b/day. The Persian Gulf state will spend as much as $35 billion in an attempt to cut its dependence on natural gas for power generation. (10/6)
Israeli energy company Delek Group said it was wading deeper into the international market by taking on a 20% stake in Ithaca Energy for $66 million. Ithaca Energy operates in the North Sea. (10/10)
In Israel, New Jersey-based Genie Energy confirmed it made a major discovery of oil and natural gas in the Golan Heights. While the company’s exploratory well drilled into a column of reserves about 1,150 feet thick, about 10 times larger than the global average, Genie said it lacks evidence at this point as to whether the new-found reserves can be technically or economically produced. (10/10)
Nepal’s fuel crisis, created by the unofficial blockade by India, has launched a discourse on the country’s energy security. As Nepal is completely dependent on India for petroleum products, a halt in fuel shipments has led to an acute shortage, forcing the government to ration gasoline, implement an odd-even system for vehicular movement and stop providing fuel to private automobiles altogether. (10/6)
In Nigeria’s deepwater zone, Royal Dutch Shell said it started operations at the third phase of its Bonga project. At its peak, the company said the third phase of the project offshore Nigeria should be around 50,000 barrels of oil equivalent. (10/6)
Plans by Nigeria, Africa’s biggest oil producer, to review offshore production contracts signed with international oil companies two decades ago, have added to uncertainty in an industry already lacking regulatory clarity. The objective is to increase Nigeria’s earnings from the fields. Yet, declining crude oil prices take away some of the incentive for investments that would’ve given the government more leverage in negotiations. (10/8)
A former Nigerian Petroleum Minister, Diezani Allison-Madueke, was arrested and released in the United Kingdom on Friday on money laundering allegations. However, she and several others may be brought to court this week. (10/6)
In Nigeria, a computer program project to increase accountability in the Nigerian National Petroleum Corporation business processes ended up running twice as long as scheduled, costing twice the amount contracted, and apparently didn’t help implicate crooked top officials who apparently stole billions. (10/7)
Brazil just held an oil and gas auction, and judging by the results, few companies are interested in developing the country’s oil and gas reserves right now. The state-owned oil company Petrobras, which is still reeling from the corruption scandal, did not participate in the auction. The unusual absence was due to the company’s massive pile of debt. (10/10)
Petrobras cut its investments and expenses outlook through 2016 following a drop in oil prices and sharp depreciation of the Brazilian real. The company said it now expects to invest $25 billion in its operations this year, down from its previous view of $28 billion, and $19 billion in 2016 instead of its previous view of $27 billion. The company seeks to preserve its fundamental goals of “deleveraging the company and creating value for shareholders.” (10/7)
In Alberta, Suncor Energy launched a hostile bid for Canadian Oil Sands Ltdon Monday as the slump in oil prices encourages consolidation in Canada’s oil sands industry, which has some of the world’s highest operating costs and lowest prices. (10/6)
As Canada’s oil patch grapples with a price shock, pipeline delays and rising tax rates, the federal election could add another barrier to recovery by reining in a key incentive for development of new wells. Two of the three major parties jostling for power in the Oct. 19 vote are campaigning against fossil fuel subsidies and propose tightening the rules for a tax deduction that allows oil-and-gas producers to write off exploration costs against profits entirely in the year they’re incurred. (10/6)
The U.S. oil rig count dropped by 9, extending a five-year low to 605, according to Baker Hughes Inc. Oil rigs declined for the sixth consecutive week, following a streak of modest growth, and is now down 62% from the October 2014 peak of 1,609. BHI said the number of gas rigs fell by six to 189. (10/10)
Oil export ban vote: The House voted 261–159 Friday to lift the 40-year-old ban on oil exports, fueling a clash with President Barack Obama and acting on one of the oil industry’s top congressional priorities. (10/10)
Exports? Two Senate committees have already endorsed the idea of allowing unlimited exports of crude oil. (10/6)
Veto the export bill? The White House said senior advisors would recommend that President Barack Obama veto a House bill to remove restrictions on exports of domestically produced crude oil if the measure reached his desk. (10/9)
Threat of a presidential veto on a House measure to lift the U.S. ban on crude oil exports suggests the effort is dead in the water, a refinery group said. (10/9)
BP’s Deepwater Horizon oil spill in 2010 was the largest oil spill in U.S. waters. The latest announcement by top officials at the Justice, Commerce, Agriculture and Interior departments, along with the Environmental Protection Agency, puts the final touches on the biggest pollution penalty in U.S. history--$20.8 billion. (10/6)
Keystone XL pipeline: TransCanada, by seeking approval for the same contentious route through Nebraska, could create another round of lengthy delays in an already drawn-out process. Former Gov. Dave Heineman approved the Nebraska route in 2013 under a state law that allowed TransCanada to use eminent domain against holdout landowners, but opponents sued and the $8 billion project has been mired in state courts ever since. (10/7)
LNG flagging: Five years ago, energy companies hungry for the next big thing started planning as many as 90 terminals to send natural gas around the globe. Now, it seems the world only needs five more. Consulting firm IHS Inc. says only one in every 20 projects planned are actually necessary by 2025 as weakening Asia economies, cheap coal, the return of nuclear power in Japan, and the ever-expanding glut of shale supply in North America temper demand for the power-plant fuel, putting tens of billions of dollars worth of export projects at risk. (10/10)
LNG bearish: It’s hard to imagine a more bearish set of circumstances facing LNG suppliers, and it’s about to get worse with exports ramping up from Australia’s latest plant and the start of commissioning of the first of a wave of new units in the United States. In previous years, the spot LNG price in Asia has shown clear seasonal movements, even within the broader price trends, generally gaining ahead of the northern winter and summers, before weakening in the spring and autumn. But this year the price has shown no seasonality. (10/6)
US investment bank JPMorgan Chase warned that new global gas price lows will demolish producer profits as top Asian consumers freeze big purchases and rework or ditch existing import deals. The bank spells out the changing strategies of the world’s top liquefied natural gas (LNG) importers — Japan’s JERA and South Korea’s Kogas — emboldened by surging supply to demand concessions from producers facing a decade of pain. (10/6)
Representatives of upstream companies say their firms are depending on a combination of belt-tightening efforts, hedging strategies and technology to deal with low oil and gas prices and the current economic doldrums. (10/6)
When rigs need repairs, rig owners are cannibalizing parts such as motors and drill pipe from idled rigs to fix 800 active ones in the US. In good times, they would buy new equipment when parts fail. Now, they just pick over any of about 1,100 rigs idled by the price crash. (10/7)
Chesapeake Energy had its credit rating downgraded by one notch to Ba2 because of the shale player’s cash flow problems in the weak market, Moody’s said. Moody's also revised its overall forecast for Chesapeake from stable to negative. (10/7)
Money saved at the pump: New analysis of the spending patterns of 25 million people shows that households spent about 80 percent of the windfall they received as a result of lower fuel prices — higher than suggested by some early government estimates. (10/8)
US coal consumption for the power sector should decline 8.2 percent from last year and be the lowest amount since 1989, according to US EIA. A projected 28 percent drop in natural gas prices compared with 2014 and weak demand due to mild weather have continued to drive coal consumption down. (10/7)
German industrial output fell in August at its fastest pace in a year, data from the Economy Ministry showed on Wednesday, suggesting Europe’s largest economy may have lost momentum in the third quarter. Factories produced 1.2 percent fewer goods than in the previous month. (10/7)
Volkswagen conceded it won’t be able sell diesel-powered vehicles in the U.S. for a prolonged period, withdrawing a request for regulators to certify new models in the wake of an emissions-cheating scandal. (10/8)
U.S. vehicle fuel economy has increased by 5.1 mpg, about 25 percent, since October 2007, when the University of Michigan’s Transportation Research Institute began monitoring, thanks to higher fuel prices and tougher government standards. But the improvement has stalled as lower fuel prices have encouraged buyers to trade efficiency for increased size. The average fuel economy for vehicles sold in the U.S. in September was 25.2 miles per gallon, down by 0.6 mpg since August 2014. (10/6)
World population result? Mankind’s insatiable appetite for seafood has decimated global fisheries. A disturbing new report from the World Wildlife Fund and the Zoological Society of London reveals that the number of fish and other aquatic animals dropped 49 percent between 1970 and 2012. (10/5)
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