Quote of the Week
About Latin America: “The 70 percent drop in prices is a major shock. Oil was contributing in some countries from 20 to 50 per cent government revenues and 50 to 96 percent of exports. No wonder we are starting to question the financial viability of some countries and some national oil companies.”
Luisa Palacios, head of Latin America at Medley Global Advisors, a risk consultancy
1. Oil and the Global Economy
Oil prices rose for the third consecutive week with New York futures closing at $35.92 a barrel and London at $38.72. Prices in London are now up 3.9 percent for the year. Behind the price rise is a continuing drop in the number of drilling rigs operating in the US and the announcement by several major shale oil producers that they plan to suspend new drilling until prices recover. Exactly where profitability is these days is in dispute with some drillers contending they can make money from shale oil if prices rise into the mid- $40s as compared to $60-70 two years ago. Some of these claims are for the benefit of the banks who have become very wary of the oil industry in recent months. The downside, of course, is that if shale oil producers start increasing production if prices get into the mid-$40s, they could easily drive them back down again with unsaleable production.
The hype about the “critical mass” of oil producers freezing their production at January levels continues to inspire traders to bid oil prices higher. Most analysts know that included in Moscow’s “critical mass” are only those countries that are already pumping flat out and have little chance of increasing production significantly above January levels. The few countries who can increase production, notably Iran and Iraq, are still doing their best to pump and export more oil. Thus, the hype about a freeze in production is only noise which, of course, helps exporters get more money for their product in a time of overproduction, so they all join into the freeze pact, some with hints that the freeze may someday turn into actual cuts.
Oil’s fundamentals still say that overproduction is alive and well despite small cuts in OPEC and US production in February. The threat of insufficient storage capacity for the excess oil production continues to grow. In the US, the Cushing, Okla. storage facility is now at 90 percent of capacity. In Europe, the large tank farm at Rotterdam has a record number of ships waiting to unload when space for their cargoes becomes available.
The IEA is still saying that supply and demand are unlikely to come back into balance before the end of the year, and even then the world will have 1 billion barrels plus of excess oil in storage that will have to be worked off before significant price increases can occur. Short of export disruptions, most likely to occur somewhere in the Middle East, it may be several years before the markets and the stockpiles come back into balance. On top of this, we have the uncertainties as to where the Chinese economy is going, as bad economic news from Beijing is frequent these days.
In the meantime, the woes of the global oil and gas industry continue. Some 48 oil and gas producers filed for bankruptcy in North America last year, and more are expected to follow suit in 2016. The newest problem is what happens to the contracts of the “midstream” companies that invested billions in new plants and pipelines to process and deliver crude to refineries. If their oil producers go into bankruptcy, many midstream energy companies will not be far behind as their revenues will dry up. One economist who follows Texas closely notes that the last time oil production was weak there were only about 130,000 people working in the oil industry. This compares to 230,000 workers this January. These numbers imply that we could see another 100,000 Texas oil jobs cut in coming months.
The Wall Street Journal assures us that while the major banks have advanced billions to companies that have or could go into bankruptcy, there is nothing to worry about as the banks are well diversified with much of their oil lending going to the major integrated producers that are likely to pay back their loans. Even in the banks’ worst case scenario under which oil prices fall to $25 a barrel and stay there for 18 months, the banks say they will be all right.
With natural gas futures now priced around $1.79 per million BTUs, a 17-year low, and cash prices in the Marcellus shale now around $1, many producers are clearly losing a lot of money. There is now a record 2.53 trillion cubic feet of natural gas in storage as the winter gas withdrawal season draws to a close and stocks start rebuilding again. If injections into storage caverns this spring and summer are similar to last year, there may not be enough storage space by September. While export demand is growing, it will be several years before this can have a significant impact on the natural gas glut. Unless we have an unusually hot summer, it is likely that many producing wells will have to shut-in during the coming year.
2. The Middle East & North Africa
Iran: Six weeks after the lifting of the sanctions, Iran is shipping only about a third of the 500,000 b/d increase in exports it said could be achieved in a month. However, Tehran is expected to export some 250,000-300,000 b/d to France and Spain in March. A combination of aging oil fields, lingering banking sanctions, an oversupplied oil market, and Arab hostility is restraining a more rapid increase in exports. The Arab controlled Su-Med pipeline which is used to ship oil in larger quantities around the constricted Suez Canal still will not transfer Iranian oil while it “reviews the sanctions.” Banking restrictions are still forcing Iran to resort to bartering in order to sell its oil to some countries. The hoped-for surge in foreign investment into reviving Iran’s oil fields has yet to take place due to bickering among the various factions in Tehran.
Although the moderate forces in Iran seeking to revive Iran’s economy made impressive gains in the recent elections, the balance of power still lies in the hands of the conservative coalition of clerics, the Republican Guard, and the security services. This coalition realizes that the sanctions agreement could lead to better economic conditions, but refuses to allow the openness to Western influences which could threaten its power. The aging theocrats are particularly concerned about effects that increased contacts with the West could have on their society. As with the oil shipments, the question of significant Western investment in Iran’s economy is still open so long as the conservatives continue to throw people in prison for little more than fostering better relations with the outside world.
Syria/Iraq: The ceasefire in Syria seems to be holding. Moscow continues a diminished number of attacks on anti-Assad rebel targets, but government/Hezbollah efforts to move against rebel-held towns have largely ceased. The bottom line is that most of Syria is inhabited by Sunni Muslims who despise the minority Assad government that has ruled and mistreated them for decades, in recent years with increasing Russian and Iranian support. While government forces and their foreign allies have made military progress in recent months in the wake of large-scale indiscriminate Russian bombing, there are few grounds for long-term stability with a minority government kept in power by foreigners still in control.
On Thursday, there was a nationwide power blackout for unexplained reasons, but some parts of the country had its power restored by week’s end. The availability of power in Syria depends mostly on where you live. Some cities which are controlled by rebel forces have not had power for months as the government uses electricity as a tool to apply pressure on its enemies. In the ISIL-controlled areas, two hours a day is the norm due to fuel shortages. The blackouts increase to 12 hours a day in government-controlled cities. Most important installations have generators. Moscow announced that they brought their generators with them to Syria so that the nationwide blackout did not affect its bombing operations.
Over in Iraq, things are about the same. As ISIL is now constrained in its military operations due to US and allied air power, it is stepping up suicide bombings. Last week a twin suicide bombing killed at least 70 in a Shiite district of Baghdad and another south of the city which killed some 60. Preparations for an eventual move on Mosel continue.
Iraqi oil exports slipped in February due to bad weather at the Basra export terminal, and the outage of the pipeline from Kurdistan to Turkey has been closed since February 17th. The pipeline is supposed to reopen shortly allowing crude from Kurdistan and Kirkuk to flow once again to foreign markets. Low oil prices and the inability to move oil out of the province are bringing pressure on the Kirkuk government.
Concerns are increasing that the Mosul dam could burst at any time threatening the lives of 1 million people living downstream. The dam needs constant maintenance to keep from washing out. This has been lacking since ISIL briefly took over the dam last fall and looted the maintenance equipment. An Italian company has been engaged to maintain the dam, but with the spring floods coming, some fear their participation will be too late. If the dam breaks, ISIL-controlled Mosul will be the first major city to feel the impact of the flood.
Libya: Formation of a new unity government is still up in the air as the recognized parliament in Tobruk refuses to vote on its formation. The UN may move ahead and announce the new government without the approval of one faction’s parliament. The US and EU are preparing for special forces/airpower intervention in Libya as doubts increase as to just how strong the Islamic State has grown in the country. While western estimates are talking about a force of 5-6,000, others say this number is overblown.
Last week the British government sent 20 soldiers to Tunisia to secure the border against Islamic State terrorists infiltrating the country and recruiting new members there.
Saudi Arabia/Yemen: The war in Yemen goes on indecisively, with little movement reported. Civilian casualties continue to mount including four nuns who were executed along with other residents of the nursing home they were running. Warnings of increasing famine continue.
The Saudis are cutting their multi-billion-dollar aid program to Lebanon because that country is now so firmly in the hands of Hezbollah and Iran that spending money to gain influence there in times of low oil prices is not worth the effort.
Riyadh’s foreign assets slipped by $14.3 billion in January to a four-year low of $549 billion as the government maintained its spending levels in the face of low oil prices. The only good news for the kingdom was that it was able to raise its oil prices for Asian customers 25 cents a barrel in light of the recent climb in oil prices.
Last week China lowered its official growth targets for the next five years to 6.5-7 percent as the economy continues to contract. Outside economists say this number is still too high, and real GDP growth is more likely in the range of 4-5 percent. The government also began working on its overcapacity problem in heavy industries, the so-called “zombie factory” problem, by announcing the layoff of some 5-6 million state workers over the next two or three years. The government has promised job retraining for those laid off, but this is a long-term project.
Due to the week-long China-wide winter holiday which can fall in either January or February, economists tend to lump the two months together when assessing year over year growth rates. This year the two-month average showed that growth in 2016 was off to a slower start than anytime since 2009. Profits at large companies fell by 2 percent last year, the first contraction in a decade, and profits at state-owned companies fell by 22 percent. Moody’s cut its outlook for China’s credit ratings last week due to growing concerns about its slowing economy.
China’s small refiners, known as teapots, have recently banded together to buy crude jointly. This will allow the teapots to get better prices from foreign buyers and will eliminate the credit problems that come when small, unknown firms attempt to purchase crude on the international markets. China’s recent jump in diesel exports that has upset the Asia markets may be slowing. The government recently halted cuts in domestic retail prices which will encourage refiners to sell more of their product at home.
New air quality rules are requiring a switch to higher quality gasoline which now is in short supply in China. This has resulted in high-quality gasoline being shipped from Amsterdam, which exports more gasoline than anyone else, to China – a rather long trip. The sharp increase in demand has resulted in a back-up for barges full of gasoline at Amsterdam’s port while awaiting tankers going to China.
Moscow has been doing well lately. Its intervention in Syria certainly has caught the world’s attention making President Putin a major player in Middle Eastern politics. The indiscriminate bombing of towns that do not like President Assad is driving more refugees in the EU which is payback for the Crimean sanctions, and Moscow’s backing of the production freeze proposal has helped move oil prices some $7 or $8 higher and stabilized the ruble. While all these may be short-lived foreign policy gains, Moscow is making to most of them while they last.
Russia’s oil production remained flat in February, which is taken as a sign of the “freeze” deal, but Moscow’s production increase has been rather small in recent years, and many outside observers do not think they can continue to increase without outside help much longer. Gazprom announced that its production in 2015 was down from 2014 and said that it has negotiated a $2.1 billion loan from the Bank of China. As the sanctions have nearly eliminated Russian company’s ability to borrow in the West, China has become the lender of last resort.
Manufacturing in Russia during February declined more than forecast as export orders fell. The volatility of the ruble in recent months has not helped the situation. A business confidence index shows increasing pessimism about the future within the Russian business community. Moscow is still talking about selling off parts of its oil industry, which is its most valuable asset, to raise money. Given the treatment of foreign investors in Russian oil projects in recent years, it is doubtful if there will be much interest in the West in owning a share of Russia’s oil industry.
5. The Briefs
Oil tracking: Determining how much oil is pumped by global producers is a moving target. It relies on a 50-year-old tanker-tracking system to help offset national interests that can shroud the data in secrecy and deceit. While measuring output is always important, it’s likely to become even more key after a tentative pact announced last month by Saudi Arabia, Russia, and others to freeze output at January levels. (3/4)
Norway is ready to spend its way through the drop in oil prices. The plunge in crude prices is squeezing the economy of Western Europe’s biggest oil producer, driving up unemployment and threatening to halt growth. The government has already boosted spending to record levels and will this year tap the nation’s $810 billion sovereign wealth fund for the first time. (3/1)
Norway’s Statoil said it was building a better position in the emerging reserve potential offshore Ireland. Statoil, alongside Exxon Mobil, was awarded the rights to explore roughly 2,900 square miles of the deep waters off the Irish coast during a 2015 auction. (3/30)
UK Oil & Gas Investments said oil was moving to the surface freely from the Kimmeridge reserve area of the Horse Hill shale basin at more than 900 barrels per day. The company’s CEO said the Kimmeridge play “has moved from a science project into the zone of commercial reality.” (3/2)
The Trans-Adriatic natural gas pipeline consortium, slated to bring non-Russian natural gas to southern Europe starting in 2019, said it awarded contracts for pipeline construction in Greece and Albania. (3/5)
The Asian gasoline market is swamped in supply, because refineries are running at maximum rates to take advantage of positive margins while demand has not kept up. (3/4)
Arab states’ sovereign wealth funds built with petrodollars aren’t investing much lately. In fact, they’re selling. That’s bad news for Asia and other locations where Arab state investments in real estate, infrastructure and security have funded major expansion and growth in recent years. (3/1)
In Nigeria, Shell is being sued in London for the second time in five years over spills in the Niger Delta. Two communities are claiming compensation and want Shell to clean up their land. (3/2)
Nigeria will break up its state-owned oil company into 30 separate units within weeks in a bid to reform the unprofitable entity, Managing Director Kachikwu said. Each company will have its own managing director and the Nigerian National Petroleum Corp. plans to become profitable by the end of the year. (3/4)
Uganda and Tanzania have agreed at a private meeting on Tuesday to build a crude pipeline 700 miles across their countries, connecting landlocked oilfields to the Indian Ocean. Decisions surrounding the design and financing of the crude pipeline and a refinery have repeatedly pushed back the target date for producing Uganda’s first oil, after deposits were initially discovered a decade ago. (3/2)
Re offshore Mozambique: A cooperation agreement has been signed to build a $6 billion, 2,600 km pipeline to send natural gas to South Africa. The planned link will export the gas resources of Mozambique’s Rovuma Basin, meeting growing demand in South Africa for natural gas to generate power. The line will also provide offtake opportunities for other countries in southern Africa. (3/2)
Brazil’s Petrobras will slash its five-year investment plan by about one-fifth next month as low oil prices, massive debt, and fallout from a corruption scandal hobble its ability to fund offshore projects. Petrobras, the world’s most indebted big oil group and subject of a multibillion-dollar corruption probe, has debt costs that have hit 13 percent from 4 percent a few years ago. (3/2)
Colombian exports slumped to their lowest level since 2007 in January, as prices fell for the Andean nation’s oil, coal and coffee. Exports fell 37 percent to $1.84 billion from the same period in 2015. Oil and mining exports fell 47 percent to $844.5 million in January. (3/4)
Mexico’s Pemex, the world’s eighth-biggest oil producer, lost $30 billion last year, prompting the Mexican government to say it would help plug the state-owned company’s $91 billion of pension liabilities and potentially even recapitalize it. (3/2)
Petróleos Mexicanos will cut $5.5 billion from its budget this year by deferring investments in deepwater drilling and reducing costs. The company reported its 13th quarterly loss on Monday, bringing its total losses for 2015 to $32 billion. For Pemex, which has seen its production decline for 11 straight years and faces another 5 percent drop this year, delaying investments in new production could be an especially perilous strategy. (3/1)
The US oil rig count fell by eight to 392 in the week ending Friday, down from 922 in the comparable week a year ago, Baker Hughes said in its weekly report. Gas rigs dropped by five to 97 week on week, down from 268 rigs working a year ago and the lowest since 1987 when BHI began using this format of rig reporting. The total US oil and gas rig count fell by 13 rigs from the week before to 489. (3/5)
The Texas Railroad Commission, the state’s energy regulator, reported crude oil production for December, the last full month for which data are available, at 74.6 million barrels of oil, a decline of about 3 percent from November. (3/2)
US crude oil exports actually declined 7% during January, the month after decades-long restrictions on exports were lifted. Prior to the US repealing its trade restrictions, the nation allowed cargoes to Canada and — occasionally — other nations, subject to strict licensing requirements. Though those limits are no longer in place, U.S. crude shipments are hitting a global market in which supply has overwhelmed demand. (3/5)
US exports: Exxon Mobil has become the first major US oil company to ship American crude overseas, joining a band of independent traders that are trying to ease a glut at home after a 40-year export ban was lifted. Exxon shipped the US crude to a refinery it owns in Sicily. (3/4)
Aubrey McClendon: The actions that resulted in former Chesapeake Energy CEO Aubrey McClendon’s indictment aren’t uncommon across the shale patch, lawyers and analysts said. McClendon was charged Tuesday with allegedly violating antitrust laws known as the Sherman Act by coordinating a scheme in which two companies didn’t bid against each other for oil and natural gas leases in Oklahoma. He died in a car crash the next day. (3/4)
Exxon Mobil, the oil giant at risk of losing its top-notch credit rating, is planning to raise $12 billion in its biggest bond offering as it seeks funds for future acquisitions and other business opportunities. The world’s largest oil company is offering debt in eight parts at above average yields. (3/1)
ExxonMobil, the world’s largest listed oil company, expects its production in 2020 to be roughly the same as last year, as cuts in investment prompted by the low price of crude force the group to abandon its earlier projections of growth. Exxon expects output from its 45,000 oil and gas wells to average the equivalent of 4 million to 4.2 million b/d through the end of the decade. The company intends to lower spending by about 25 percent this year to $23.2 billion and will continue shaving cash outlays through the end of 2017. CEO Rex Tillerson also played down speculation that Exxon would be making acquisitions following its $12 billion bond sale this week. (3/3)
Anadarko Petroleum announced plans to sell $3 billion in assets this year while cutting spending on new wells and other projects by almost 50 percent as the oil and natural gas producer weathers the crude market collapse. Anadarko’s U.S. onshore activities will be reduced the most, by almost $2.5 billion. Anadarko will also lower its onshore rig count by 80 percent to five. (3/2)
In North Dakota, a research team is exploring an EOR (enhanced oil recovery) option: how to use carbon dioxide to coax more oil out of wells that have already been hydraulically fractured, or fracked, in the process of extracting oil from shale rocks. (2/29)
The NYMEX March gas futures contract settled at $1.71 per million BTUs, down 47.8 cents from the February contract’s close of $2.18. (3/2)
The average US gasoline price is moving higher at its fastest clip in four months as seasonal and market pressures mount. Motor club AAA reports a national average retail price for a gallon of regular unleaded gasoline at $1.76, up 6 cents over the prior week. (3/2)
Biofuel blues: U.S. oil refiners paid more than $1 billion to comply with rules to produce more ethanol-infused gasoline last year, the most in two years. This is according to filings that will likely intensify the debate over who should foot the bill for the nation’s biofuels program. (3/5)
An El Niño factor: the rise of the shale boom has created a new seasonality in oil markets, with harsh northern weather typically curtailing supply due to road closures or frozen fracking fluids. But this past winter has skewed that pattern thanks to the strongest El Niño conditions in nearly two decades. From the warmest Alberta winter in 90 years to bursts of cold in Texas, weather has affected drillers, and probably oil production, in unusual ways. (3/1)
The vast coal seams beneath the Northern Plains have fueled boasts by industry representatives and elected officials of enough coal in domestic reserves to power the US for centuries. But a new government analysis says that at current prices and mining rates the country’s largest coal reserves will be tapped out in just a few decades. (3/1)
Coal fell to just 27.6 percent of US utility-scale power generation in December while generation fired by natural gas hit 33.8 percent. While there is limited capacity for coal-to-gas switching, the trend is likely to continue until natural gas prices climb above $2.50 per million BTUs, which is the generally acknowledged level at which Powder River Basin coal becomes competitive with natural gas ($1.79 as of last Friday). December marked the seventh time in 2015 that natural gas-fired generation surpassed coal-fired generation. Prior to 2015, coal had always been dominant to natural gas for power generation. (2/29)
Emissions battle: The Supreme Court on Thursday denied a long-shot request by states seeking to block an environmental regulation cutting mercury pollution from power plants, a boost for the Obama administration. (3/4)
Fukushima: A report from Greenpeace says that the destruction of ecosystems caused by the Fukushima meltdown is worse than the government lets on, with up to hundreds of years of devastating impacts on the ocean, waterways, plants, and animals. (3/5)
In Japan, three former Tokyo Electric Power (Tepco) executives were indicted on Monday for failing to take safety measures to prevent the nuclear disaster at Fukushima Daiichi plant in 2011. The indictments, forced through by a civilian judicial panel, are the first against officials at Tepco and come just before the fifth anniversary of the meltdowns at the Fukushima nuclear station north of Tokyo. (3/2)
Wind power researchers at the University of Virginia and Sandia National Laboratory are developing an extremely long wind turbine blade that could make it possible to construct 50-megawatt turbines—far beyond the power of today’s, which tend to produce just two megawatts. The blades would be 200 meters long, 2.5 times the length of the longest blades commercially available today. The cost of electricity goes down as blades get longer, but transporting the longer blades would be a challenge. (3/1)
Crescent Dunes Solar Energy’s 110 megawatt concentrating solar power (CSP) electricity plant, began full operation in February. Crescent Dunes uses an energy storage system that developers expect will be able to store enough thermal energy to generate electricity for up to 10 hours after sunset or on cloudy days when direct sunlight is unavailable. Through December 2015, CSP made up 8 percent of total US solar electric generating capacity, while utility-scale solar photovoltaic (PV) made up 53%, and distributed solar PV made up 38%. (3/5)
First Solar says it has converted 22.1 percent of the energy in sunlight into electricity using experimental cells made from cadmium telluride—a technology that today represents around 5 percent of the worldwide solar power market. (3/5)
Climate scientists have bad news for governments, energy companies, motorists, passengers and citizens everywhere in the world: to contain global warming to the limits agreed by 195 nations in Paris last December, they will have to cut fossil fuel combustion at an even faster rate than anybody had predicted. (3/1)
Japanese authorities said they found on-road emissions were up to 10 times higher than in laboratory tests of certain diesel-powered vehicles made by Toyota Motor Corp., Nissan Motor Co. and Mitsubishi Motors Corp. sold in Japan. No illegal software was found in any of the tested cars and the auto makers haven’t violated any regulations, officials said. (3/4)
In New Delhi, school children at the American Embassy School wear face masks against the polluted air here, the worst in the world in the estimation of the World Health Organization. (3/2)