Quote of the Week
"The problem is going to be the money. Where is the money going to come from? A lot of people who have burned their fingers on (U.S. shale) are going to be reluctant to reinvest."
Arnaud Breuillac, president of exploration and production at French oil giant Total.
1. Oil and the Global Economy
Oil had a good week for a change with New York futures rising 3.2 percent to close at $32.78 and London climbing 6.3 percent to close at $35.10. This time, there was more than just wishful thinking behind the price increase as pipeline outages shut in 600,000 b/d in Kurdistan and 250,000 b/d in Nigeria to cut global exports by 850,000 b/d. In both cases, it is unclear as to just when the pipelines will reopen. In Nigeria, the outage was due to an underwater leak while the situation in Kurdistan likely is related to one of many wars taking place in the region.
Despite the outages, the global market is still oversupplied and many traders are looking for the Saudi-Russian production “freeze” to morph into an actual production cut that will rebalance the markets. However, at the IHS-CERA oil conference in Houston last week, Saudi Arabia’s oil minister made it clear that a production cut was not going to happen despite all the hype and optimism. The Iranians seconded the sentiment saying they were not going to freeze or cut anything until their production was back to the pre-sanctions 4 million b/d. Moscow chimed in with the claim that even with a freeze its oil production could set a new post-Soviet record this year.
Amidst all the gloom and doom about low prices at the Houston conference, the IEA rolled out its most recent thoughts about the future of oil. The Agency naturally is concerned about the major cutbacks in capital investment that are underway and believes the industry will be hard pressed to recover after prices rebound later in the decade. The executive director of the IEA says he expects prices to climb back up to $80 a barrel by 2020. He also believes there will be a second leg to the US shale oil boom which will be quick to recover when prices rise and will send US domestic oil production to new highs by 2021.
In the meantime, the US oil industry is going through a major contraction with numerous bankruptcies and much selling off of assets. During the Houston conference, it was noted that the reason there are so few mergers is that many company debts become due the minute the company comes under new ownership. Few companies are willing to bear the upfront costs of paying off the debt of new acquisitions, even at bargain prices.
For the immediate future, it looks as if US shale oil production will be falling as the number of active drilling rigs continues to fall steadily. The week before last the rig count fell by 13 to 400. However, there still remains a backlog of hundreds of wells that have been drilled and are awaiting fracking before they can start producing. This backlog and increasing production from large offshore projects nearing completion in the Gulf of Mexico may be enough to keep US domestic production from falling as fast as many foresee. Even the Saudis noted in Houston last week that the US shale oil industry is very light on its feet. Once having established itself in an area with drill sites, permits, and the logistic infrastructure already in place, shale oil production can be increased very rapidly in comparison to what would be required to increase OPEC members’ production. The problem in increasing shale oil production will come when the most productive “sweet spots” are all drilled. Some knowledgeable observers believe this will come circa 2020.
Concerns once again are increasing that a shortage of oil and oil product storage capacity in the US could drive oil prices considerably lower within the next few months. The main US storage facility and futures delivery point at Cushing, Okla. is already 80 percent full, is turning away some types of business, and at the current rate of filling will be completely filled in another four months. The same problem is occurring in other facilities along the Gulf Coast and in the mid-west. Refiners in the mid-west are already cutting back gasoline production as the demand is simply not there despite the very low prices ($1.11 in parts of Minnesota) and the much-ballyhooed economic recovery. Some analysts are convinced that another major down leg to the oil markets is virtually certain to occur before supply and demand come back into balance.
Another interesting situation is arising in the natural gas markets where prices touched a new 17-year low last week, below $1.75 per million BTUs. Most believe the cost of producing shale gas is in the vicinity of $4 to $6 per million; it is obvious that natural gas producers, and Wall Street, are losing a lot of money. Currently, prices are being pushed down by an unusually warm winter and stockpiles which are about 30 percent above normal for this time of year. Close examination of US natural gas numbers, however, shows that production is starting to drop and is now down about 1.2 billion cubic feet/day from last September’s output.
Obviously, prices cannot remain this low for long and a rebound before the end of the year is highly likely. Many gas producers used hedges to capture the $5 per million prices that obtained in 2014, but those hedges have now expired and producers are fully exposed to the low market prices. Some analysts believe that we will soon see rapid cutbacks in production with even the possibility of shortages later this year. More electricity producers are switching to natural gas to comply with EPA regulations and US LNG exports are just getting underway amidst much hype about America supplying Europe and the world with cheap natural gas.
Conventional natural gas production in the US is down by 17 billion cubic feet/day since 2008 and continues to drop at about 5 percent a year. While this has been made up in recent years by the rapid increase of shale gas, it seems that this too will be coming to an end, both through low prices and geologic constraints. Given the ongoing decline in conventional gas production and the rapid depletion that takes place in existing shale gas fields, it will take an increase of 15 billion cubic feet/day of new production in 2016 just to keep US production level for the year much less meet the expected export demand. This demand is forecast to reach 7 million cu. feet/day by the end of the decade.
All this says that there is likely to be a major rebound in natural gas prices to economic levels in the next year or so, provided financially strapped drillers can find the financing in today’s markets. LNG exports do not seem to have a bright future.
2. The Middle East & North Africa
Iran: Early returns suggest that the moderates and reformists have won a major victory in the elections for the 290 seat parliament and council of experts. In now appears that the hard-liners will lose their majority and that the Rouhani government will have a freer hand in negotiating for Western investment in the country. This election may represent a turning point for Iran where some 60 percent of the 80 million inhabitants are under 60 years old and more interested in growth than continuing the decades-old ideological confrontations with the West.
Tehran is having trouble selling its oil to European buyers because of banking sanctions still in place. After most Western firms pulled out of the country three years ago, Iran’s Republican Guard, acting through commercial subsidiaries, took over important parts of Iran’s oil business. The Guard which is involved in much subversive activity throughout the region in furtherance of Iran’s foreign policy is an anathema in Washington which continues to sanction any entity connected to the guard. In order to get around the banking restrictions, Tehran is offering to barter its oil for goods with European barters.
Iran, which needs some $30 billion in new foreign investment to meet its oil production targets, is having trouble finding foreign investors willing to risk money in developing its oil industry. Hardliners still control the security apparatus and continue to throw foreigners in prison on trumped-up charges as part of domestic squabbles. Corruption is rampant and cost overruns on projects are common. The recent cancelation of meetings in London to announce the new terms under which foreign companies could participate in Iran has not helped the situation. Pre-sanctions contracts with Iran are generally remembered as being money losers for Western firms so that far more lucrative terms for foreign investors will have to be established before the billions start to flow. The current oil glut and contraction of the petroleum industry is not helping the situation.
Syria/Iraq: The temporary truce which took effect at midnight on Friday seems to have generally held for two days with some Russian bombing of the moderate opponents of the Assad government on Sunday. ISIL and the radical al-Nusra were never part of the truce so that their forces continue attacks and the bombing of their positions continue. There are some 160 separate groups participating in the Syrian civil war, so sorting out just who is or is not part of the cessations of hostilities agreement still has a long way to go.
While the Assad government and Moscow appear to have made big gains by blowing up so much of the Syrian landscape that the anti-Assad rebels were driven from key positions around Aleppo, all may not be what it seems. Russia’s long-term ally Assad’s Syria is now a basket case with its people scattered and its economy existing on handouts from Russia and Iran. If enough relief supplies can get to besieged people in the next few days maybe the incentives to flee to Europe will lessen, but this is problematic. How all this will ultimately impact Middle Eastern oil exports is still way up in the air, but the ever increasing hatreds do not bode well for the future. Last week some 600,000 b/d of oil from Kurdistan and Kirkuk ceased flowing into Turkey for an indefinite period. Given the growing hostilities between the Kurds and the Turkish government, it would not be surprising if Ankara did not see an advantage in attempting to slow Kurdish oil shipments across its country.
The Financial Times reported last week that ISIL still manages to produce and sell enough oil to keep itself in business despite the heavy bombardment of what is left of Syria’s oil facilities by both Russia and the US alliance.
Last week hundreds of thousands of demonstrators led by the infamous Shiite leader Muqtada al-Sadr gathered in Baghdad to protest the slow pace of reforms and the government’s refusal to incorporate Shiite militia units into the Iraqi army. Such a move would lessen the chances that Iraq will survive as a unitary state and increase the possibility that it will split into separate Kurdish, Shiite, and Sunni countries. For now, the current Shiite-dominated Iraqi government is trying to keep the Iraqi Army from being completely dominated by Iran if it is ever expected to maintain the peace in the Sunni parts of Iraq.
Libya: Foreign military involvement in Libya is on the upswing as special forces units from the US and the EU enter the country to train local forces to confront the Islamic State. The US and what remains of the Libyan Air Force continue to conduct air strikes against the Islamists. Armed US drones are now patrolling the country. Efforts to form a unity government continue with no progress reported last week.
There has been little word on Libya’s oil production of late. Should peace break out, and a responsible, stable government come into power, the country still has the potential to increase its oil exports by a million or so barrels per day rather quickly.
Saudi Arabia/Yemen: A major battle is shaping up around the capital of Sanaa as Saudi-led troops move to recapture the city and Houthi defenders move to shore up defenses. Some 40 civilians were killed on Saturday as Saudi aircraft struck a market near the city.
According to the Saudis, 20 nations participated in a massive military exercise in northern Saudi Arabia on Saturday. The government is trying and will probably execute 32 Shiites on charges of spying and fomenting discontent on behalf of Iran. Some of those arrested were prominent Shiites who are opposed to the Saudi government. As their troubles grow, the Saudi government is becoming increasing intolerant of dissent and is now treating nearly every anti-government or anti-Islam act as terrorism subject to harsh punishment or death.
The Saudi monarchy has clearly started on a downhill path. Whether it will take months, years, or decades before there is serious trouble impacting oil exports is unknown, but movement is underway.
The government is taking steps to suppress information suggesting that the economy is not doing as well as official pronouncements portray. Numbers are being omitted from economic reports. Reporters are being fined for stories suggesting that the stock market will go down further. Stories that hint that the party is no longer able to control China’s quasi-market economy, which is a mixture of capitalism and state planning, are forbidden. All this suggests that the economic situation is worse than generally believed.
Beijing’s drive to become a major exporter of oil products is depressing oil refining margins across Asia. China has recently opened several new and highly efficient refineries which, in conjunction with government policies, has enabled an 80 percent increase in Chinese oil products in 2015. Until last year China exported little diesel as rapidly growing mining, power generation, and trucking industries could consume nearly all that was produced. Now with industrial output shrinking, very cheap crude, and an overcapacity of efficient refineries, China as forced Asian refining margins to 6-year lows.
With sales of new cars doing well, the demand for gasoline continues to expand. However, increased gasoline production has led to the production of more diesel than can be consumed. Hence the jump in exports. Exports, however, slid in January due to a new government policy of not lowering domestic retail fuel prices below those in effect when oil was going for $40 a barrel. This resulted in a decline in exports that month as refiners could obtain more for their product by selling it domestically rather than exporting it into markets with lower prices.
4. The Briefs
The shadow of peak oil: Outside the US and Canada, world oil production has been in peak mode for more than 10 years now. There are many events which have brought about this bumpy production plateau. The sequence of these events has never allowed oil production to grow much. We have seen the predicted negative feedback loops when oil production gets harder and more expensive. The end result of this phase is a weakened financial system with more debt and many government budgets in deficit. The response to peaking conventional oil production has been money printing and production of unconventional oil. If oil prices stay low for a longer time, oil production will ultimately go down and 2015/16 may be the global peak. (2/24)
The UK released provisional data for 2015 that show primary energy production increased 9 percent, the first such increase since 1999. The government attributed the increase to new oil and natural gas production plus fewer maintenance shutdowns. By itself, crude oil production surged by almost 14 percent. (2/26)
UK’s North Sea oil and gas producers will spend 40 percent less this year than in 2014 as low crude prices force them to tighten budgets. Capital expenditure will drop to 9 billion pounds ($12.7 billion) this year from 11.6 billion pounds last year and 14.8 billion pounds in 2014. (2/23)
Eni SpA promised more cost cuts as the recent plunge in global crude prices claimed another major oil industry casualty, tripling the Italian company’s fourth-quarter net loss. To confront the continued low price of crude, Eni said it would shave capital expenditures by 20 percent in 2016, after trimming costs by a similar amount last year. (2/27)
Oman, the poorest Gulf Arab country on the basis of economic output per person, was cut for the first time by Moody’s Investors Service, which cited the negative impact of lower oil prices on government finances, economic performance, and balance-of-payments. Oman’s credit rating was reduced by two levels to A3 and placed on review for a further downgrade. It’s Moody’s first downgrade of the nation since issuing its initial rating in 1999. That puts it on par with Mexico and Malaysia. (2/27)
Indian state refiners are jointly negotiating oil purchase deals with OPEC producers for the first time, as the world’s third biggest consumer seizes on low prices to wrest better terms in a market awash with crude. (2/24)
Offshore Australia, the timing couldn’t be worse for the first production of natural gas from their $54 billion Gorgon project – the world’s most expensive. Prices for liquefied natural gas (LNG) have collapsed, global demand is faltering and the first of what is likely to be a wave of competing shipments has just set sail from the United States. But with tens of billions of dollars already invested, the oil majors behind Gorgon and other Australian LNG projects have little choice but to plow on. (2/27)
Offshore Egypt, Danish engineering company Subsea 7 said it was awarded a contract to help BP develop three gas fields, including laying export lines. (2/27)
Central African oil player SOCO International said it came up empty-handed while drilling in the waters off the coast of the Republic of Congo. (2/27)
As Venezuela grows closer to exhausting nearly every means of paying its debt, some oil market participants are seriously pondering the possible implications of an unprecedented event: the default of a major crude producing company. State-run firm PDVSA faces around $5.2 billion in payments to bondholders in 2016, much of it in October and November. (2/27)
In Venezuela, Russia’s Rosneft agreed to pay $500 million to Petroleos de Venezuela to increase its stake in their Petromonagas crude-processing joint venture. The deal will increase Rosneft’s stake in the upgrader that converts heavy oil into synthetic crude to 40 percent. (2/22)
Mexico, which ended a 76-year oil monopoly in 2014, is now speeding the liberalization of the fuel market as it seeks to lure investment and push down prices for consumers, President Enrique Pena Nieto said. Starting in April, companies other than state-owned Petroleos Mexicanos will be allowed to buy gasoline and diesel from overseas markets for the first time since the industry was nationalized in 1938. (2/23)
Canadian oil production should continue increasing through 2017, according to the EIA. Canadian oil sands projects that were already under construction when prices began to fall in 2014 and that are expected to begin production in the next two years are the main driver of production growth. (2/26)
In Canada, the chief executive of leading oil producer Suncor Energy Inc. said on Tuesday that his company will increase output even if crude prices weaken further while vowing it will emerge stronger than ever from the current commodity industry downturn. (2/24)
In Canada’s oil sands, the growth engine of the energy industry is poised to shut off next decade, according to the International Energy Agency. Production gains from the oil sands in northern Alberta will slow dramatically or come to a halt as crude prices remain low and costs too high for one of the world’s most expensive sources of oil. (2/23)
The US oil rig count fell by another 13 to 400, Baker Hughes said Friday. The report marks the 10th straight week of declines in the number of working rigs. Natural gas rigs gained by 1 to 102, bringing the total U.S. rig count down by 12 to 502. In 2015, drillers cut on average 18 rigs per week for a total of 963 oil rigs for the year. Looking forward, analysts forecast the rig count will bottom in a few months before recovering later this year when they expect crude prices to rise. (2/27)
Texas crude plus condensate declined a little in November but seemed to make up that decline in December, according to recent data from the Texas Railroad Commission. (2/22)
Oil refiners are set to enjoy another year of robust profits as feedstock prices remain low, but new plants and slower global growth mean 2016 will not be a boom year. Refineries operated at full throttle throughout 2015 and booked the strongest profits in years as demand surged 1.8 million b/d, or more than 2 percent from the previous year. This year, the IEA has said it expects demand growth of 1.2 million bpd, down from last year’s unusually high rate, as the global economy slows and new car purchases decline. (2/26)
J.P. Morgan Chase & Co. expects to further build reserves related to potential energy losses in the first quarter as the prolonged decline in oil prices continues to hit U.S. banks. The company said it plans to build reserves by about $500 million for oil and gas and an additional $100 million related to metals and mining. (2/24)
Pipeline angst: Within weeks, two low-profile legal disputes may determine whether an unprecedented wave of bankruptcies expected to hit US oil and gas producers this year will imperil the $500 billion pipeline sector as well. (2/23)
$50 oil: Oil companies are working to put in place lower cost bases that will enable them to survive in a world in which crude prices could remain at about $50 per barrel for many years to come. Two years ago John Watson, chief executive of Chevron, observed that “$100 per barrel is becoming the new $20”. He meant that the cost of finding and extracting oil had risen so much that companies like his needed a markedly higher crude price to achieve the same profitability that had been possible at significantly lower levels a decade earlier. Today, it seems that $50 is the new $100. (2/26)
Exxon Mobil Corp. failed to replace its oil and gas production last year for the first time in 22 years. The development speaks to the depth and power of a price crash that has intensified this year as crude continues to sell for around $30 a barrel. (2/22)
Halliburton Co, pressured by a prolonged slump in crude oil prices, will further slash its workforce by about 8 percent, or by 5,000 jobs. The company had about 65,000 employees worldwide at the end of 2015, compared with more than 80,000 at Dec. 31, 2014. The company reported a $28 million loss for the fourth quarter against a profit from the previous year’s quarter of $901. (2/26)
Apache Corp’s shares are down 45% in the past year. Apache reined in capital spending plans for 2016 to $1.6 billion and expects to reduce production by roughly 9 percent, excluding Egypt. Last year, Apache’s capital spending totaled $4.7 billion, a reduction of more than 60% from 2014. (2/26)
In Virginia, Lt. Gov. Ralph Northam issued a letter to the federal Bureau of Ocean Energy Management saying the state was best served by staying out of future offshore drilling activity. (2/27)
OK quake suit: The Sierra Club and the public interest law firm Public Justice filed a federal lawsuit Tuesday against three energy companies engaged in hydraulic fracturing in Oklahoma. The suit against New Dominion, Chesapeake Operating, and Devon Energy Production Company alleges that wastewater from fracking and oil production have contributed to the state’s alarming spike in earthquake activity. (2/22)
Fracking Florida: With geology akin to a wet sponge and fragile underground aquifers that supply almost all its drinking water, Florida has never been considered part of the agitated battle over fracking as a technology for extracting oil and gas. But that began to change two years ago when a Texas-based oil and gas company was found to have been using hydraulic fracturing and matrix acidizing, a fracking-like method that dissolves rocks with acid instead of fracturing them with pressurized liquid. (2/24)
US crude-by-rail shipments dipped nearly 17 percent in 2015 as domestic crude oil production slowed, according to the Association of American Railroads. Total traffic for the year dipped 2.5% to nearly 28 million carloads, trailers and containers, according to the AAR. Of that amount, crude by rail is still just a fraction of total shipments, accounting for 1.4% of carloads last year, compared with 1.6% in 2014. (2/25)
US LNG: Regular cargoes of liquefied natural gas from the U.S. may be a far more significant event for the world energy market than oil exports, even if they are initially inconsequential for the domestic one. (2/27)
US exports: Dutch oil trader Trafigura confirmed it delivered a cargo of crude oil sourced from U.S. basins to Israeli refineries in an early start for U.S. oil deliveries. (2/25)
Meltdown confession: In Japan, the operator of the Fukushima power plant has apologized for not announcing its nuclear reactors were in meltdown for months after a huge earthquake and tsunami devastated the facility five years ago. Tokyo Electric Power Company (TEPCO) denied for two months after the disaster that a meltdown had taken place. (2/27)
Nuclear competition: China wants to shift from customer to competitor in the global nuclear industry as it seeks to roll out its first advanced reactor for export, a move that adds new competition for already struggling global firms. (2/24)
China will aim to close more than 1,000 coal mines over this year, with a total production capacity of 60 million tons, as part of its plans to tackle a price-sapping supply glut in the sector. (2/23)
China’s efforts to take the lead in electric vehicle development will focus on battery technologies and public vehicle fleets, in a bid to kick an over-dependence on subsidies, according to officials. (2/25)
Honda Motor Co. wants partially or fully electric cars to account for two-thirds of global sales by 2030, its chief executive said, laying out long-term priorities after his inaugural year was dominated by safety issues. (2/24)
German carmaker Volkswagen has been asked by U.S. authorities to produce electric vehicles in the United States as a way of making up for its rigging of emission tests. (2/22)
With lithium prices skyrocketing beyond wildest expectations, talk heating up about acquisitions and mergers in this space and a fast-brewing war among electric car rivals, it’s no wonder everyone’s bullish on this golden commodity that promises to become the ‘’new gasoline”. (2/26)
The worsening of tidal flooding in American coastal communities is largely a consequence of greenhouse gasses from human activity, and the problem will grow far worse in coming decades, scientists reported Monday. Those emissions, primarily from the burning of fossil fuels, are causing the ocean to rise at the fastest rate since at least the founding of ancient Rome. (2/23)
Carbon capture: While the landmark emissions-reduction agreement in Paris among 195 countries late last year was seen as a defeat for fossil fuel producers, executives and oil ministers sounded a clarion call this week at their first major meeting since the Paris talks for more research into how carbon capture technology can be cheapened and perfected. (2/26)
In India’s capital of Delhi, more than 10 million people are without water after protesters sabotaged a key canal which supplies much of the city. The army has taken control of the Munak canal after Jat community protesters, angry at caste job quotas, seized it. (2/23)