Quote of the Week
Exxon Mobil and climate change spin: “This could open up years of litigation and settlements in the same way that tobacco litigation did, also spearheaded by attorneys general. In some ways, the theory is similar — that the public was misled about something dangerous to health. Whether the same smoking guns will emerge, we don’t know yet.”
Brandon L. Garrett, professor at the University of Virginia School of Law
1. Oil and the Global Economy
After a bounce last Tuesday, oil prices continued to fall closing on Friday at $44.29 in New York and $47.42 in London, down 4.9 percent and 4.3 percent for the week respectively. While oversupply and weak demand remains the basis for the price decline, the jump in US employment with the prospects of higher interest rates and a stronger dollar helped with the decline on Friday. The Wall Street Journal’s Dollar index was recently at its highest level in 13 years against the euro, yen and other currencies.
Last week was also a bad one for the fossil fuel industry with President Obama rejecting the Keystone Pipeline proposal which has been under consideration for seven years and Exxon being subpoenaed after evidence emerged that it has been deceiving the world about the effects it had discovered about carbon emissions and climate change. Finally, Beijing said it has been burning 17 percent more coal in recent years than it has been publically admitting raising a new issue for the Paris climate change conference due to start next month.
All this leads to the conclusion that a changes are taking place in the way fossil fuels are perceived. The Keystone decision, much to the surprise of official Washington, was partially brought about by a wave of citizen activism by people unusually concerned by carbon emissions and climate change. Environmentalists are saying that the earth has about five times the fossil fuel reserves that it is safe to burn without destroying the atmosphere. Concerns about climate change may come to occupy a growing place in decisions as to the use of energy.
In recent years conventional wisdom has held that while some day the earth will be powered by renewables, these will be so slow in coming into widespread use that we will have to keep on burning fossil fuels at roughly the current pace for many decades. The fossil fuel industry has considerable fiscal and political resources built during centuries of supplying the energy needed to build and run our civilization. It also has many political allies in the US and around the world. Many countries have few sources of revenue other than extracting and exporting fossil fuels adding to the reluctance to reduce consumption. As we have seen in the recent price drop, the loss of this revenue can be very painful to oil exporting nations.
Gloom and doom continued across the oil industry last week. The US rig count fell for the 10th week in a row. Federal regulators issued a report saying that non-performing energy loans have quadrupled to $34.2 billion in the past year as oil prices fell. This now amounts to about 12 percent of the banking industry’s $276 billion worth of oil and gas loans to the industry. In the Persian Gulf, oil producers are delaying projects and squeezing their contractors for hundreds of millions in savings. The Saudis recently postponed a $3 billion expansion project; the UAE another $3 billion project; and in Oman a critical $1.4 billion pump installation was delayed until better times.
A new study of the Bakken shale oil fields in North Dakota says that only about 1 percent of the region has “sweet spots” rich enough to produce shale oil at a profit while oil currently is selling for $30 a barrel at the wellhead. Only 4 percent of the horizontal wells drilled in the Bakken in the last 15 years can make a profit at this price. Production companies are losing from $11 to $38 a barrel on their shale oil which is why Wall Street is becoming increasing skeptical about continuing to finance these projects. Some two dozen companies operating in the state have filed for bankruptcy in the past year. Last week several major shale oil producers released preliminary plans to cut capital spending in 2016 indicating that spending may again fall by double digits after reductions of 30 to 40 percent in 2015. Some East Coast refiners that have been using oil from the Bakken in recent years are said to be looking to import foreign crude as North Dakota production declines and the price of imported crude falls.
Despite the recent price drop, however, many producers have been able to sustain a substantial proportion of their peak shale oil production by using various stratagems to increase efficiency. Production has not as yet fallen anywhere near as far as the drop in drilling rigs and capital expenditures would suggest. A handful of producers are even talking about increased production next year.
Oil production from “megaprojects” — Arctic, ultra-deep, oil sands, and even Gulf of Mexico production — are in trouble too because of mounting costs. ConocoPhillips recently said it will be out of deepwater oil and gas exploration by 2017. Some say other companies active in deepwater exploration and production may have to resort to mergers and acquisitions to survive the unprofitable selling prices for oil.
Change is clearly taking place. Some believe, thanks to the ongoing price declines, that world oil production may have already reached some sort of a “peak” – either temporary or forever, whereas BP is saying that thanks to new technologies global fuel reserves will double by 2050 to 4.8 billion barrels. Industry leaders seem to be saying that scarce oil is not a problem (they of course leave out the growing costs of extraction) but that the falling demand — which results in a peak.
2. The Middle East & North Africa
Iran: As movement towards lifting of the sanctions continues, a debate has started as to how fast Iran can gain what it calls “its rightful” share of the global oil market. Tehran claims it can increase production and exports by 1 million b/d within weeks of of the sanctions being removed. The IEA says it could increase production by about 800,000 b/d within six months, but other remain skeptical that it can find markets in an oversupplied world with many sellers willing to cut prices to make a sale.
Some see Europe as the best place for Iran to sell its oil sales. Given the obvious interest in the EU on reducing dependence on Russia for oil and gas, much the continent would seem to be a prime market. It all depends on who can offer the best prices and where geopolitical considerations go in the next few years.
Efforts by hardliners in Tehran to disrupt what they see as a threat to their power and influence from the growing rapprochement between the Rouhani government and the West, particularly the US, continue. The arrest of journalists and representatives of western companies (mostly Iranian-Americans) by security personnel who are outside of the Rouhani government’s control could lead to more trouble and a setback in relations. Tehran’s deep involvement, at both the military and political level, in the rapidly changing and highly unstable situation in Syria is another factor that could complicate Iranian oil sales.
Syria/Iraq: Confirmation that the Russian tourist plane downed in the Sinai was due to a terrorist bomb begins a new page in the Middle Eastern story. The immediate response was an increase of bombing of ISIL targets by Russia, but there is still more to come. Tehran seems to have brought back to participate in peace talks, possibly by Moscow, and there are reports of more non-combat Russian military personnel appearing around Syria. In the meantime, we have heard little of the much-heralded government/Russian offensive to drive rebels out of Aleppo. Indeed, there have been reports of rebel advances in the West despite the addition of Russian air power and possibly artillery, and more Iranian “volunteers” to the fighting.
This uprising is becoming increasing brutal. In response to government shelling of a rebel-held suburb of Damascus which is causing significant casualties, the rebels now say they will place captured government officials and their families in cages atop buildings being subjected to shelling. The refugee crisis can only get worse as Russian and Iranian participation increases.
A new report from the IMF says that Iraq needs an additional 1.3 million b/d in oil exports and the return of $70 a barrel oil to balance its budget. At current prices however, production can only contract due to the lack of capital to expand production.
Libya: The conflict between the two governments affected oil exports last week. Libya’s Petroleum Facilities Guard halted oil shipments from Zueitina indefinitely last week. The guard seems to be siding with the Tobruk government in Tripoli by demand that any tanker shipments have the approval of the eastern government’s oil company.
Tripoli’s National Oil Company Chairman Mustafa Sanalla says current national production is around 415,000 b/d with exports at 320,000-330,000 b/d, mainly from AGOCO and Sirte oil units, Mellitah complex and an offshore field.
Saudi Arabia/Yemen: There has been little progress in the Saudi-led drive to push the Houthi rebels out of the capital and back into their northern homeland. Operations were slowed last week by two major storms – highly unusual for this part of the world – that hit the Yemeni coast.
Much of the reporting on Saudi Arabia this week has centered on the state of its economy now that it is running large deficits as the monarchy tries to keep its populace happy with massive subsidies; fights and/or finances proxy wars in Yemen and Syria; maintains its share of the global oil market; and attempts to drive US shale oil producers out of business.
The Saudi Interbank lending rate rose to a six year high last week as the government and companies continue to borrow at an increased rate. Bank loans were up by 9 percent year over year in August. The oil minister has rejected calls to reduced the oil subsidy which has gasoline going for 46 cents a gallon. Any move to increase gasoline prices is likely to result in a backlash from motorists who have become accustomed to cheap fuel. Observers in Riyadh report that Saudi consumers are still spending as if there were no oil price crisis. It is the monarchy’s policy to share much of its oil revenue through generous subsidies with the Saudi people who in return let the royal family run the country. For now the monarchy seems willing to run large deficits rather than risk the Saudi version of a “social contract” between rulers and ruled.
Saudi Arabia’s financial problems are not yet acute, but given the course of events in the Middle East they seem likely to become so by the end of the decade.
3. China
Chinese factory activity continued to shrink in October with the Purchasing Managers Index coming in just a hair into the contraction side of the equation. As the core justification for Communist Party rule in China rests on maintaining policies that foster rapid economic growth, official numbers dealing with the state of China’s economy need to be carefully watched. A large amount of more detailed data on China’s economy is due to be released in the next couple of weeks which should give outside observers a better picture of what is going on. President Xi set a new floor for China’s annual GDP growth of 6.5 percent, suggesting that will be all the lower official Chinese growth numbers will go for some time to come.
The admission last week that China has been burning 17 percent more coal than has previously let on comes as a shock. The new data was released without fanfare in China’s annual statistical yearbook, and shows that coal consumption has been underestimated for the last 15 years and has been particularly off the mark in recent years. The data is said to have come from a 2013 economic census which for the first time included information from small coal companies and small factories.
Given the size of China’s economy, a 17 percent discrepancy is highly significant adding about 600 million tons to China’s coal consumption in 2012 – an amount which is about 70 percent of all of the coal consumed in the US. The newly released data started a round of discussions as to how much China’s emissions data will have to be revised and what the impact will be on climate change negotiations. It is now known that China burned some 4.3 billion metric tons in 2013, but as the newly discovered coal is likely to be of lower quality and less energy content, it is difficult to to say how much greater carbon emissions have been in recent years. Initial estimates range from 4 to 11 percent.
Arrivals of large crude carriers into Chinese ports last week fell to 12 from 20 the previous week. If this situation continues we will be seeing a drop in China’s crude imports which have remained stronger than the state of its economy would suggest. This is believed to be caused by imports of cheap crude to fill the newly created strategic reserve tank farms and the opening of several large new refineries.
4. Russia
5. The Briefs
In the North Sea, the pressure is building on drillers, starved of contracts as Statoil deepens cuts in investment, to cope with a collapse in crude prices. In less than 18 months, Norway’s biggest oil company has scrapped four years worth of drilling by canceling or suspending rig contracts. By the time the market turns, drillers may be forced to scrap as many as 20 units in Norway and the U.K. (11/3)
In the North Sea, the reality of oil prices halving and staying that way is hurting. That companies have hesitated to decommission aging facilities is perhaps unsurprising. But a decision by Fairfield Energy to decommission the Dunlin fields, northeast of the Shetland Islands, has sounded alarm bells, partly because the fields still hold significant reserves, but also because of the impact on the viability of the Brent pipeline system. (11/5)
North Sea duality: Faced with the collapse in oil prices, the two dominant North Sea producers are taking opposite approaches to bolster dwindling investment: The U.K. is offering carrots (tax breaks), while Norway is wielding a stick (threatening removal of access to licensing). (11/6)
The Swiss are praying for rain on the Rhine River before winter as low water levels restrict barges transporting supplies of heating oil to the land-locked European country. Water levels have slumped to the lowest in a decade, leaving fuel supplies stuck in the Netherlands and Belgium, where stockpiles are already at a seasonal record high because of a global glut. Vessels must sail with smaller-than-normal cargoes to avoid getting held up. (11/6)
Maersk Oil, Denmark’s biggest company, said profit at its oil unit dropped 86 percent in the third-quarter—to $32 million this September from $222 million in 2014—as energy prices fell. (11/6)
European Union regulators are preparing a strategy to import more liquefied natural gas (LNG) while scrutinizing Russia’s plans to expand its pipeline capacity to Germany, a draft EU document says. The document is part of the European Commission’s efforts to enforce a single energy market, based on regional cooperation and diverse sources of energy shared across the 28-member bloc. (11/4)
Ukraine, an important consumer of liquefied petroleum gas (LPG), is tentatively turning to Western suppliers as it aims to wean itself off potential supply disruptions of Russian and Belarusian imports. (11/4)
LNG slump: When the IEA published a report four years ago heralding a “golden age of gas” it seemed little could derail a bright future for the energy source. Now, with prices slumping and demand in key consuming countries like China looking shaky, the energy industry’s optimism about gas seems to have fizzled out. Particular concern hovers around the market for liquefied natural gas. (11/2)
Japan’s Toshiba, struggling with a major accounting scandal, is trying to sell down a $7.4 billion commitment to U.S. liquefied natural gas which it signed two years ago as part of a plan to sweeten sales of turbines for power plants. A plunge in Asian gas prices means an expected U.S. export bonanza has fizzled out before it even started. (11/6)
In Russia, one of the nation’s most powerful men said the country has the reserves on hand to satisfy Japan’s entire demand for liquefied natural gas. The invitation to do so came as Russian Prime Minister Dmitry Medvedev outlined a $1.1 billion investment program for development in eastern Russia. (11/7)
Global demand for OPEC’s crude oil will remain under pressure in the next few years, the producer group said in an internal report, potentially fueling a debate on its strategy of defending market share rather than prices. The draft report of OPEC’s long-term strategy forecasts crude supply from OPEC – which has an output target of 30 million barrels per day – falling slightly from 2015’s level until 2019, unless output slows faster than expected by rival producers. (11/5)
Israel’s economy minister resigned on Sunday, allowing the government to move ahead with stalled plans to develop two offshore gas fields—Leviathan and Tamar—after nearly a year of political wrangling. The government will push through a framework to develop the gas fields despite the plan having been ruled anticompetitive by the country’s regulator last year. (11/2)
In Nigeria, Royal Dutch Shell lied when it claimed it had cleaned up heavily polluted areas of the Niger Delta, according to Amnesty International and the Centre for Environment, Human Rights and Development (CEHRD) in a new report published on Tuesday. The report titled, “Clean it up: Shell’s false claims about oil spills in the Niger Delta”, documents ongoing contamination at four oil spill sites that Shell said it had cleaned up years ago. (11/4)
Nigeria’s National Petroleum Corporation will sell crude oil directly to refiners and purchase refined oil products from them, a measure intended to cut out roughly 44 middleman companies and curb graft from the oil sector. (11/7)
Chevron said the development of oil reserves straddling the maritime border of the Republics of Congo and Angola could serve as a model for Africa. Chevron’s subsidiary in the region announced it started oil and gas production from the Lianzi field in a unified offshore economic zone. (11/4)
In Brazil, growing friction between the CEO of state oil company Petrobras and its board is threatening to hamper the company’s efforts to shore up its finances. An oil-workers strike launched Sunday has shut down up to 13 percent of Petrobras’ daily crude production, crimping the company’s already weak cash flow. In addition, continued upheaval in the boardroom is raising fresh concerns about a leadership vacuum as the company struggles to pare a mountain of debt. (11/6)
At Petrobras, a four-day strike gathered steam on Wednesday, cutting crude and natural gas output from the No. 2 South American oil producer and threatening to become the most disruptive walkout at the state-run oil company in 20 years. (11/5)
Venezuela wins: President Barack Obama’s rejection of TransCanada Corp.’s proposed Keystone XL pipeline could give Venezuela’s ailing economy a lifeline. The South American country produces heavy crude that’s similar in consistency to the one coming from Canada’s oil sands, and its economy relies largely on shipping it to the same US Gulf Coast refineries that Keystone XL was meant to supply. (11/7)
Mexico reduced its crude exports to the US in September to the lowest level in more than 25 years as it looks further away for buyers, with Gulf Coast refiners flooded with shale and oil sands. Petroleos Mexicanos, the state-owned oil company, shipped 550,000 b/d to the US in September. That’s the lowest level in Energy Ministry records dating back to 1990. (11/4)
The Keystone XL Pipeline announcements last week, first by TransCanada and then by President Obama, won’t have much effect on the U.S. energy industry, experts say, largely because American refiners have found other ways to get crude oil from Canada. Oil imports from Canada set a new record in August, averaging 3.4 million b/d. (11/4)
The U.S. oil rig count declined for a tenth week in a row this week, though the rate of decline moderated. Drillers removed six oil rigs in the week ended Nov. 6 to 572, around a third of the 1,568 oil rigs operating in same week a year ago. Over the last 10 weeks, drillers cut 103 oil rigs. (11/7)
Exxon Mobil in the hot seat: The New York attorney general has begun a sweeping investigation of Exxon Mobil to determine whether the company lied to the public about the risks of climate change or to investors about how those risks might hurt the oil business. (11/6)
New York’s decision to probe climate change disclosures by Exxon Mobil marks the most aggressive state action yet on the financial effects of burning fossil fuels. The investigation is seeking information on whether the world’s biggest oil explorer lied to investors and the public for almost 40 years about the impact of climate change on profits. (11/6)
At Exxon Mobil, whoever succeeds Rex Tillerson as CEO will inherit a company that’s far poorer and without obvious growth opportunities. When Tillerson took over, Exxon had $28.7 billion in cash and was pumping almost 4.3 million barrels of crude daily. Today, Exxon’s output is down to 4 million barrels a day, and its cash reserves have declined 85 percent, to $4.3 billion, eroded by soaring project costs and collapsing energy prices. (11/6)
Working natural gas in storage reached 3,929 billion cubic feet as of October 30. This level matches the previous weekly record of 3,929 set November 2, 2012. Largely depending on the weather, inventories could surpass 4 trillion cubic feet in the coming weeks. (11/7)
Sales of trucks powered by natural gas are sputtering and growth will be far weaker this year than last as tumbling diesel prices prevent drivers from switching over to the cleaner-burning fuel even though it is cheaper than it has been in years. Sales of medium and heavy duty natural gas trucks are expected to rise less than 1 percent this year after climbing nearly 27 percent in 2014. (11/5)
North Dakota turn-down? A sudden lack of interest in Bakken crude by at least one east coast refinery reflects a dramatic recent change in the way East Coast refineries are sourcing the crude that they turn into everything from gasoline to heating oil and jet fuel. A slight drop in daily production in North Dakota means that it is slightly more expensive, after transport costs, than oil shipped from Latin America, the Middle East and Africa, prompting East Coast refiners to return to a foreign crude diet they derided as unprofitable five years ago. (11/5)
Alaska, for its entire history as a state, has made money, sometimes billions of dollars a year, by taxing the oil pumped from its wells. That 56-year winning streak is over. (11/2)
In deepwater Gulf of Mexico, Noble Energy’s two long-awaited fields came on stream ahead of schedule in late October and should reach peak in the next couple of weeks, the company’s CEO said Monday. The Dantzler and Big Bend fields, in water depths around 6,000 feet, are set to deliver over 45,000 b/d of oil equivalent gross combined at peak, and should produce at maximum of 25,000 boe/d and 20,000 boe/d, respectively. (11/3)
The Texas Railroad Commission on Tuesday accepted the findings of the commission staff that two oil and gas wastewater disposal wells were not the likely cause of a series of earthquakes that shook parts of North Texas in late 2013 and early 2014. The decision, which the commission made in an open conference meeting Tuesday morning, clears the two injection wells, owned by Houston-based Enervest and ExxonMobil subsidiary XTO Energy, respectively, of responsibility. (11/4)
Gasoline prices go up and down in tandem with crude oil. But recently, oil prices have been falling much faster than gas prices. Drivers have paid at least $1 billion more for gasoline than they would have if the historical pattern had continued this year. (11/3)
World of plenty: The world is no longer at risk of running out of oil or gas for decades ahead with existing technology capable of unlocking so much that global reserves would almost double by 2050 despite booming consumption, oil major BP’s David Eyton, Group Head of Technology said on Monday. “Energy resources are plentiful. Concerns over running out of oil and gas have disappeared.” (11/3)
The federal Renewable Fuel Standard (RFS) has created problems that require congressional attention 10 years after the 2005 Energy Policy Act (EPACT) established it, witnesses generally told a joint hearing of two US House Science, Space, and Technology subcommittees. But they disagreed on their recommendations, which ranged from adjusting provisions under EPACT and the 2007 Energy Independence and Security Act (EISA), which expanded RFS quotas, to repealing the entire statute. (11/5)
Floating wind? The Scottish government said it granted a license to the operators of what Edinburgh said may be the world’s largest offshore floating wind energy development. Norway’s Statoil was granted a license for its Hywind pilot project that envisions up to five turbines installed by an anchoring system that developers said would facilitate deep-water installation. (11/3)
