Quote of the Week

“Fossil fuels may lose 10 percent of market share to PV and EVs within a single decade. This may not sound much but it can be the beginning of the end once demand starts to decline.”
Carbon Tracker Initiative

Graphic of the Week

1.  Oil and the Global Economy

Oil prices rebounded last week as the IEA confirmed that the ten OPEC members obligated to cut oil production are making good progress and obtained 91 percent of their goal by the end of January. The agency also reported that OECD crude stocks fell by nearly 800,000 b/d in the 4th quarter of 2016 although stocks continued to grow in China and other emerging economies. If OPEC and the other production cutters can maintain this level of cuts for the next five months, the IEA says that global stockpiles should drop by about 600,000 b/d during the first half of this year.  This was the kind of news that many oil speculators wanted to hear. Hedge fund bets on higher oil prices have surged in recent weeks as many markets participants say they are expecting higher oil prices later this year.

On the other side of the coin, Non-OPEC oil production, led by the US shale industry, continues to rise so that during 2017, Non-OPEC production is expected to grow by 400,000 b/d. Global stocks were at an all-time high last year so that even with Non-OPEC output balancing off some of the OPEC cut many are saying that it will take at least the rest of the year for the markets to balance.  OPEC oil ministers are already talking about the need to extend the production cut until the end December. The IEA also reported that Non-OPEC adherents to the production cut were as yet only 40 percent of their way to their agreed production levels.

The 14-million-barrel build in US crude stocks that the IEA reported took place the week before last drove down prices early last week for a couple of days. On closer inspection, however, the large increase was due to a combination of several one-time factors that are unlikely to continue. Some 6 million barrels that had been in floating storage off the Gulf Coast to avoid year-end taxes were brought ashore the week before last and became part of the official inventory.  Favorable prices for foreign oil late last year attracted more barrels to the US than normal and a push by OPEC to increase production higher before the official production cuts kicked in resulted in large exports in December. US crude exports which peaked at 727,000 b/d last year now are down to 567,000 b/d helping with the US inventory build. US exports are expected to increase shortly as the Brent –WTI spread has widened of late making US exports more attractive.

With the help of a higher-than-required production cut by the Saudis, OPEC clearly is making good progress. However, this progress is only a one-month event, and constraints on production still have another five or more likely 11 months to run. There will be many new developments affecting oil prices in the coming year, including possible rebounds in production from Libya and Nigeria or a more probable a collapse in Venezuelan oil production.

Observers are starting to note that while the US shale industry, aided by generous loans from Wall Street, is rebounding quickly the US oil majors that are dependent on increasing expensive offshore oil production are not doing well. In fact, some observers are calling the financial situation at ExxonMobil, Chevron, and ConocoPhillips (The big three) “dreadful.”  The net income of these companies is down from $80 billion in 2012 to $3.7 billion last year, with no significant improvement in sight. Their free cash flow now is negative, and the situation would have been even worse if they had not reduced their capital expenditures from $87 billion in 2013 to $46 billion in 2016. Reductions of this size do not bode well for their oil production five years from now given the rate at which offshore deposits deplete due to heavy use of water flooding to drive up production. Moreover, as “solid” corporations, these companies felt obligated to pay out $21.4 billion in dividends last year that were not covered by cash flow. In the last three years, these companies have been selling off assets and have increased long-term debt from $40 to $95 billion to cover capital expenditures and dividends.

Where all this leaves us in the next decade depends on many variables. Unless oil prices go considerably higher in the next year or so, we are unlike to see much improvement in the offshore oil situation and therefore the prospects of the big oil companies. We currently have a shale oil boomlet in the US with oil prices below $60 a barrel. The industry continues to convince Wall Street that they have the potential to be profitable, but outside observers are skeptical. In the last two years. the shale oil industry has survived by drilling in only the best, most productive spots that will soon be disappearing and driving costs much higher. They are also surviving at the expense of the oil services industry which has been providing services at little or no profit. We are already hearing that in the booming Permian Basin costs are rising much faster than oil prices.

2.  The Middle East & North Africa

Iran: Most of the news last week dealt with the deteriorating relations between Tehran and Washington. Although unlikely to have much effect on oil the new sanctions that Washington has imposed, many commentators fear the direction the relations are going could have disastrous consequences. Tehran announced last week that it has no objection to US oil firms participating in developing Iranian oil projects, but that they are forbidden by US law and policy from business relations with Iran.

The National Iranian Oil Company announced last week that it had found 15 billion barrels of new oil, of which 2 billion are recoverable. The find, the location of which was not disclosed, includes 1.8 trillion cubic meters of natural gas. This announcement is probably related to Iran’s current effort to attract more foreign investment and technology to exploit its oil.

Iraq: There was not much news from Iraq last week other than the fighting at Mosul. Baghdad which is dependent on the US and Iran at the same time says it wants to stay out of the current tensions between Washington and Tehran. The Norwegian oil company DNO which has been exploiting Kurdish oil says it now has received $270 million from the Kurds for the oil it produced last year and is willing to continue operations including drilling new wells in Iraqi Kurdistan.

Saudi Arabia: Much of the oil news this week dealt with the upcoming IPO for Saudi Aramco. A boutique New York firm Moelis & Co has been chosen as the sole Independent advisor for the offering. The sale of 5 percent of Aramco could bring as much as $100 billion should all go well. The deal is complicated because the Saudi government would own 95 percent of the firm and determine just how much would be paid to investors in dividends. Given that the government can set the taxes, royalties, dividends and everything else connected with the company’s finances, there will have to be some very careful understandings about how the new firms would operate. Otherwise foreign “investment” in Aramco could turn out to be nothing more than a massive gift to the Saudi Royal family.

Last week the Saudis announced that an “independent” review of Aramco’s reserves show them to be exactly what the government has been claiming for years, although many are skeptical.

Libya:  Swiss commodities giant Glencore, which trades about 4.4 million barrels of crude each day, is said to have signed a deal that would make Glencore the sole marketer of one-third of the country’s current crude production. The deal would entitle Glencore to about 230,000 b/d out of total Libyan production which is currently thought to be about 700,000 b/d. Libya says it is trying to increase this to about 1.2 million by the end of the year which would take quite a big bite out of the OPEC/NOPEC production cut.

3. Russia

While Moscow says it is on the way to reducing its crude production by 300,000 b/d, it seems to be on course to increasing its Urals crude oil exports in the first half.  The government says it cut production in January by about 110,000 b/d from December and 130,000 b/d from October, the baseline for the OPEC agreement. In January, Moscow increased its pipeline shipments to Europe by 189,000 b/d from last January and 114,000 b/d from December. Tanker exports of Urals and Siberian Light crude are scheduled to increase by 6 percent to 2.3 million b/d in February. Russian share is about 50 percent of the OPEC/NOPEC production cut so how well it meets its goal is important.

The governor of Russia’s Central Bank says she is confident that Russia’s economy will grow this year even if oil prices fall back to $40 a barrel. The most recent pronouncement by the IMF has Russia’s economy contracting by 0.6 percent in 2016 and growing by 1.1 percent this year. A lot of this depends on oil prices and Moscow’s relations with the Trump administration.

4. Nigeria

The country’s vice president visited the Niger Delta last week to work out a settlement with the militant groups that did so much damage to Nigerian oil production last year. At one point production was down by nearly a million barrels a day and has yet to recover. The problem is that while most of the oil is found in the southern swamps, the people living there receive very little benefit and have had their region desecrated by numerous oil spills, many of which are caused by people stealing the oil and finished products. Several years ago, when oil prices were high, the government set up a scheme that essentially bribed the militants to keep them from destroying the oil production infrastructure located there. When oil prices dropped, the payments slowed or ceased, and a new generation of militants began sabotage attacks.

Corruption in endemic in Nigeria with billions of dollars having been siphoned off of by politicians and government officials. Until this is brought under control, the oil industry will always be a source of instability.

5. Venezuela

The economic/political situation continues to deteriorate. The newest problem is that Caracas is falling behind on its shipments to China and Russia in its oil-for-loans deals. These loans amount to some $50 billion in the case of China and $5 billion is owed to Russia. Some 45 cargoes due these countries are late for a variety of reasons mostly having to do with unpaid bills. Some one-third of Venezuela’s oil production now thought to be around 2 million b/d goes to repaying old loans and is not bringing in the revenue needed to buy food.

Last week Venezuela’s parliament annulled a $500 million deal with Russia’s Rosneft calling the sale a “betrayal” and very unfair to Venezuela. It was revealed last week that Venezuela is still sending 70-80,000 b/d to Cuba and getting no cash in return. Cuba is paying for this oil by providing medical services to Caracas and is not providing the cash that the Venezuela desperately needs to pay bills.

These problems are on top of the bonds that are coming due this year and which many believe will lead to a massive default.

6.  The Briefs

Nationalism: Much of this week’s resource news was driven by politics, with the biggest development being the Philippines’ mine ban, with protectionist moves in US oil and gas also having critical implications for investors, end users, and project developers. And there’s a common thread to both these stories. Nationalism. A year ago, no one predicted the Philippines would install a staunch environmentalist as head of mining — the way President Rodrigo Duterte did almost immediately after his election. A big motivation for Duterte is showing outside interests who’s boss inside Philippine borders. (2/7)

World shale oil? Despite having just one-fifth of the world’s shale resources, advantages in the US and Canada mean the countries will continue to monopolize the market, according to a new Raymond James report. While there is little doubt that shale resources exist in abundant quantities around the world, a variety of hurdles preclude their development, including technical know-how, regulatory barriers and other issues. (2/11)

Using a form of artificial intelligence called convolutional neural networks, Palo Alto, Calif.-based Orbital Insight can detect oil storage tankers previously unknown to existing data sources. Tracking oil storage tanks allows for greater understanding of the global supply chain. A survey of China using this technology shows that Beijing has at least 2100 onshore floating roof oil storage tanks, more than four times the number outside analysts had estimated. (2/10)

In Lebanon, the government finally opened the bidding for five offshore blocks in a first licensing round, after a three-year delay brought upon by political instability. Lebanon’s offshore fields to hold 96 trillion cubic feet of gas and 850 million barrels of oil. (2/10)

Qatar Petroleum is the hidden giant of the global energy industry, overshadowed by its neighbor Saudi Aramco. Yet, the country’s colossal natural gas resources allow the state-run company to pump more oil and gas than Rosneft PJSC or Exxon Mobil Corp. After almost two decades of breakneck growth, the company needs to change tack. QP plans to expand abroad as domestic crude output declines and the government bars new drilling in the offshore North Field, home to the gas that made Qatar the world’s leading supplier of liquefied natural gas. (2/10)

Egypt plans to import as many as 108 cargoes of liquefied natural gas this year as the country prepares to start producing at two gas fields and move closer to its goal of self-sufficiency and even exports by 2019. (2/7)

Algeria is paving the way for a stronger natural gas export profile in Europe, building off of preexisting relationships with Spain, Italy and Portugal, Forbes reported earlier this year. But efforts to restore growth based off energy sector expansion have a limited chance of revitalizing success as two years of low oil prices bear down on government revenues. (2/9)

Offshore Angola, Italian energy company Eni said Wednesday it started production at an oil facility in record-setting fashion, with a time-to-market of only 3 years—five months ahead of schedule. The company said its latest offshore floating production vessel is capable of generating up to 80,000 barrels of oil per day and can also process a significant volume of natural gas. In total, ENI said its assets there could peak at 150,000 bpd this year. (2/9)

The Nigerian Navy has rescued an oil tanker from pirates near Bonny Island, even as the number of high-seas hijackers is at an 18-year low.  The MT Gas Providence oil tanker came under pirate attack on Wednesday in River State. It was the second failed hijacking attempt in the area this week. In 2016, there were 36 recorded incidences of high-seas piracy in Nigeria—more than double the number of incidences the year before. (2/10)

Italian prosecutors are pursuing a criminal trial for Royal Dutch Shell PLC and the chief executive of Italian oil company Eni SpA on charges of corruption tied to a controversial Nigerian deal. (2/9)

Suncor Energy Inc.’s production rose to a record last quarter after the oil-sands giant took control of the Syncrude processing unit and put it at full throttle. Canada’s biggest energy company produced 738,500 barrels of oil equivalent a day in the period, up from 582,900 in the previous quarter, according to an earnings report Wednesday. (2/10)

The US oil rig count increased by eight rigs to 591, said Baker Hughes Inc. The oil rig has increased by 275 since the count bottomed in May of 2016 at 316, and has increased during 33 of the last 37 weeks.  The count hit a high of 1,609 in October of 2014 before the oil price plunge hammered the drilling industry.  (2/11)

The offshore rig market is not expected to recover during 2017 to the levels some had forecasted. As the offshore rig market continues its worst slump, maybe ever, operators and rig owners have continued to cut spending. Offshore drilling spending fell around 30 to 35 percent in 2016 and is also forecast to decline in 2017, albeit not as much. (2/11)

US oil exports are on the rise, fueled by comparatively higher prices for foreign oil they compete with and lower shipping rates. But analysts say any further increases in exports will be slow and the prospect of American energy independence remains a lofty goal. (2/11)

US exports: Crude production has slowed in parts of Latin America as oil majors struggle to pump for profits. Mexico and other Latin American countries have been relying more heavily on the United States for petroleum imports for several months now, which has led to an interesting trend. For the first time since 1993, the U.S. has a trade surplus in petroleum with Mexico. The monthly average for this past November had U.S. net exports with Mexico at over 300,000 barrels of oil per day.  (2/8)

US East Coast refineries, which have thrived for a few years on a boom of production from the Bakken shale play in North Dakota and eastern Montana, are increasingly looking abroad to supply their needs. Rising supplies overseas made imported oil cheaper than domestic for the first time since 2013. (2/7)

LNG exports from the US’s Sabine Pass hit a record in January this year, according to data from Platts Analytics. Export volumes reached 1.476 Bcm of gas equivalent. The plant started loading cargoes in February 2016. The increase in production coincides with the ramp up of the facility’s second 4.5 million mt/year train which completed commissioning and was handed over to the operator, Cheniere, in September last year. (2/11)

Two new gas pipelines to be built over the next 12-18 months are likely to bring down natural gas prices on the US market just when they were starting to rise more consistently. While this is good news for consumers, it is not so welcome news for producers, who might have to start thinking about finding new markets. The pipelines in question are Atlantic Sunrise, a project of Williams Partners, and Energy Transfer Partners’ Rover—both moving gas out of the constrained Utica and Marcellus shale gas plays. (2/10)

Record prices for drilling rights in the Permian Basin, the most fertile U.S. shale field, are prompting oil companies and private equity investors to look elsewhere for the next big gushers. Explorers eager to tap the basin’s mile-thick stack of oil-soaked rock layers have paid as much as $60,000 an acre. That marks a 50-fold explosion in deal prices over four years, according to Wood Mackenzie Ltd. It also pushes the cost 10 times higher than in the Bakken of North Dakota. (2/11)

BP is looking at ways to incrementally increase its footprint in U.S. shale oil and gas production, its Chief Executive Officer Bob Dudley said on Tuesday. (2/7)

Dakota pipeline: The US Army Corps of Engineers will grant the final easement needed to finish the controversial Dakota Access Pipeline, according to a court filing Tuesday. The $3.8 billion line needed a final permit to tunnel under Lake Oahe, a reservoir that is part of the Missouri River. The Standing Rock Sioux tribe, whose reservation is adjacent to the line’s route, has said they will fight the decision. The Army Corps had previously stated that they would undertake further environmental review of the project. (2/8)

BP said it needs oil prices to rise to $60 a barrel in order to break even, as the British oil giant ramped up debt levels last year to fund spending, maintain its dividend and cope with costs associated with the 2010 Deepwater Horizon disaster. The company said Tuesday the blowout in the Gulf of Mexico cost it another $7.1 billion in pretax payments last year. The total pretax bill has now reached $62.6 billion. (2/8)

Transparency repealed: On February 3, the Republican-led Senate used an obscure procedural tool to end a bipartisan provision meant to fight corruption and overseas oil bribery, a rule opposed by Rex Tillerson as head of ExxonMobil. The Securities and Exchange Commission’s transparency rule, part of the 2010 Dodd-Frank financial reform bill, was created to reduce corruption by requiring drilling and mining companies to disclose royalties and other payments made to governments in exchange for oil, gas, and mining extractions. (2/10)

A potential increase in gasoline taxes in several US states could put a dent in demand at the pumps and mark another setback for a market already flooded with excess fuel. Some 21 states—many where gasoline taxes have not risen in decades—are discussing hikes. Conditions might be ripe for the proposed increases to win approval in state legislatures, in large part because of crumbling road conditions and a lack of revenue to fix them. (2/10)

SPR sale: Oil companies Shell and Phillips 66 together bought 6.4 million barrels of oil last week from the Strategic Petroleum Reserve, according to a Department of Energy document released on Tuesday. (2/8)

“Widowmaker trade:” After several years of neglect, oil investors are again betting heavily on the price difference between two global benchmarks – Brent and US crude futures – due to a push in Washington to impose a controversial import tax. (2/8)

Coal price comeback: Many a swan song has been sung for thermal coal markets as renewable power generation and a push towards using more natural gas have gained traction. Yet a coal price spike last year, driven by a Chinese change in regulation that capped local mining operations, has shown how easily markets can swing from oversupply to shortfall. (2/10)

Fukushima record: The highest radiation levels ever measured at Chernobyl were 300 sieverts per hour … a dose which can kill a man almost instantly. To put this in perspective, radiation is usually measured in thousandths of a sievert, called millisieverts. But a radiation level of 530 sieverts per hour has just been measured at Fukushima’s number 2 reactor. This new record at Fukushima is 70% higher than that of Chernobyl. The highest level previously measured at Fukushima was 73 sieverts per hour, in March 2012. (2/8)

Wind towers: When engineers faced resistance from residents in Denmark over plans to build wind turbines on the Nordic country’s flat farmland, they found a better locale: the sea. The offshore wind farm, the world’s first, had just 11 turbines and could power about 3,000 homes. That project now looks like a minnow compared with the whales that sprawl for miles across the seas of Northern Europe. Now 32 turbines reaching 600 feet in height are going in offshore UK waters. (2/7)

Statoil announced its first wind turbine from the Dudgeon facility off the British coast was now providing electricity to the nation’s grid. Up to 6,000 homes are now getting power from offshore wind. Once in full operation later this year, the entire Dudgeon wind farm will have the capacity to provide power for more than 400,000 average households. (2/10)

French RE: A move by the French government to budget for more solar and hydropower projects on its grid was endorsed Friday by the European Commission. The French government said new solar initiatives would receive more than $9 billion in support over the next 20 years, while hydropower schemes are backed by a 20-year $530 million commitment. (2/11)

Volkswagen launched a US subsidiary Tuesday designed to oversee $2 billion in investments to promote zero-emission vehicles such as electric cars, a commitment the German auto giant made in the wake of cheating on U.S. emissions tests for several years. (2/8)

EV threat? Nobody would have predicted ten years ago, back when everyone was talking about Who Killed the Electric Car, that oil would someday have to fear the future of General Motor’s EV1. Practically none of the 1,117 units were still in commission in 2006 when the movie first aired, but today there’s a whole new fleet. In fact, oil majors are worried that electric powered cars could soon replace traditional combustion engines. (2/7)

EV/PV ambush? The falling cost of electric vehicle and solar technology will halt demand growth for oil and coal from 2020, posing a threat to fossil fuel companies unprepared for the transition. This finding is according to research published on Thursday by the Grantham Institute at Imperial College London and independent think tank Carbon Tracker Initiative. (2/8)

EV buses: Volvo Buses has received an order for eight electric buses in the UK. When the vehicles enter service in 2018, the project will be the first of its kind in the UK introducing full electric vehicles using opportunity charging via the common interface OppCharge, whereby the charging stations can also be used by electrified buses from other vehicle manufacturers. (2/7)

Larson-C: A rapidly advancing crack in Antarctica’s fourth-largest ice shelf has scientists concerned that it is getting close to a full break. The rift has accelerated this year in an area already vulnerable to warming temperatures. Once the crack reaches all the way across the ice shelf, the break will create one of the largest icebergs ever recorded, and will let glaciers behind it flow faster to the sea. (2/7)