Quote of the Week
“There has been no recovery in offshore and international oil and gas activity with the price of crude in the $50 range … for companies with significant exposure, offshore and internationally, the downturn in the oil and gas industry is not over, and job cuts may continue.”
John Graves, CEO of Graves & Co.
Graphic of the Week
1. Oil and the Global Economy
Oil prices have moved little since they jumped from the mid-$40s to the mid-$50s in late November. Last week was no exception. OPEC hints about extending the price cuts beyond mid-year supported prices last week despite several indicators which suggested that the surplus may continue and it may be difficult to rebalance the markets in the short term.
The top oil news story last week was that US crude and gasoline stockpiles were up once again and are now at a 27 year high. While crude oil stocks normally grow at this time of year, the jump in the US gasoline inventory to a record 259 million barrels came as a surprise. In recent months, traders have been saying that the higher US gasoline consumption we have seen recently bodes well for crude. According to the EIA, last month US gasoline consumption fell to a 15-year low of 8.2 million b/d down 4.4 percent from January 2016. A drop of this size is leaving analysts confused as the state of the US economy has been respectable of late, and there would seem to be no reason for a drop in domestic gasoline consumption at this time. US drivers, however, did drive an additional 85 billion miles in the first 11 months of 2016 as compared to 2015 due to low gasoline prices.
Some believe that the 50 cents per gallon gasoline price increase to $2.31 a gallon in the past year may be behind the drop in consumption. Others, however, believe that the EIA’s drop in consumption of 450,000 b/d is too high when compared to the level of economic activity. If consumption remains low for the next two or three months, it is likely to impact the amount of crude going into refineries and become a drag on crude prices.
As could be expected, much of the discussion last week focused on the efficacy of the OPEC/NOPEC cut and will it force oil prices out of the narrow trading range where they have been stuck since November. Early last week there was much analysis of how well OPEC was complying with the planned production cuts. Some noted that the 90 percent compliance was not as good as it seemed as it neglected to mention the increases in Libyan and Nigerian production. If Libya should be able to reach its possibly wishful goals of pumping 1.2 million b/d by August and 1.7 million by next spring, then much of the OPEC/NOPEC production cut will be offset. As the Saudis absorbed much of the production cut, it should be noted that Riyadh managed to boost its production just before the cuts started so that the “cuts” are coming from a higher-than-normal base. The Saudis use about 300,000 b/d of crude in the summer to power air conditioning in the Kingdom and exports usually fall in the summer months. By cutting crude production in the winter, the Saudis can maintain the bulk of their exports as the excess is not needed in the winter.
While the Iraqis cut production in January, early indications are that some of the cut was due to maintenance and that production will increase in February with higher exports from Basra and also from the northern oil fields via Kurdistan. Baghdad and the Kurds are desperate for more money due to the life and death struggle with ISIL. There are still concerns about how much Moscow will actually contribute to the cuts. So far it is supposed to be about 100,000 b/d out of the 10 million that it is currently producing. There are already indications that its exports will be increasing.
Another major issue is just much and how fast US oil production will increase in the coming year. Rig counts in the US continue to increase and billions of dollars are being spent on increasing US shale oil production, particularly in the Permian Basin. The price of new oil leases there have soared and have been as much as ten times higher per acre than in the Bakken shale oil fields. Some optimistic observers are talking about US crude production increasing by as much as 500,000 b/d this year even with oil prices below $60 a barrel. US production is now back to nearly 9 million b/d and EIA expects that US shale oil production will increase by 80,000 b/d in March.
On the other hand, the crisis in Venezuela continues to get worse with many talking about a financial default followed by a societal collapse this year. Should this happen, anywhere up to 2 million b/d of crude production could be taken from the markets, an amount sure to drive oil prices higher.
2. The Middle East & North Africa
Iraq: There are mixed reports as to Baghdad’s intentions to comply with its obligations to cut oil production by 210,000 b/d. Shipments were up in the first half of February to 3.93 million b/d which is higher than October’s 3.91 million b/d, the baseline for the cut. However, loading schedules from Basra for March show the country exporting only 3.01 million b/d which would be a substantial cut. Part of the lower exports may be due to maintenance. The South Oil Company which operates Basra says it will stop loading for 24 hours while it installs a new pipeline.
Baghdad has asked OPEC to list its official reserves as 153 billion barrels up from the previous estimate of 143 billion. The increase is said to be due to new appraisals that foreign oil companies have been carrying out at seven oil fields in central and southern Iraq. The new figure puts Iraq closer to official reserves of 158 billion, but well behind Venezuela’s 301 billion and the Saudi’s 266 billion.
The Iraqis say they want to acquire a “large fleet” of oil tankers to replace the ones destroyed in 1991 during the Kuwait war. Baghdad is also interested in expanding its refining capacity by adding 12 or 13 new refineries over the next four years. Plans for refinery expansion have been around for 20 years, but have been on hold since the struggle with ISIL began.
It now appears that ISIL will be driven out of Mosul shortly, but should the group scatter into smaller terrorist cells, attacks on Iraqi oil infrastructure would be a prime target. A rare outbreak of violence occurred in Basra last week with the assassination of a leading politician and detonation of six bombs around the city. The country’s troubles are far from over. At the rate temperatures are rising in the Middle East, it is doubtful that many will be around to exploit those 153 billion barrels of oil.
Saudi Arabia: Attention is starting to focus on the Saudis domestic consumption of oil. Much of the “success” of the OPEC/NOPEC production cut has been due to a 500,000 b/d drop in output; however, a significant share of this cut has come from domestic consumption that is not needed in the winter to support air conditioning. The Saudi Energy Efficiency Center says that fuel consumed for power has increased by 135 million b/d of oil equivalent annually during the past eight years. However, policies are starting to change, and the country is embarked on programs to use abundant solar and natural gas resources to generate power while increasing gasoline prices to curb domestic consumption. In coming years, this will free up millions of barrels of revenue-generating oil for export.
Problems are arising concerning the forthcoming IPO of a small part of Saudi Aramco. As the Saudis’ largest and most efficient company, it has been asked to undertake a wide variety of projects that have nothing to do with oil and gas. The question is now arising as to whether shares to should be offered to investors that involve dozens of unrelated industrial projects, or should the company be restructured to focus on oil and gas only.
Another problem is just what are the companies “profits” from which dividends would be paid. As a wholly-owned subsidiary of the government, which is, in reality, the royal family, the company is thought to retain about 10 percent of after-expense earnings to reinvest in developing oil projects. The other 90 percent went to the government in the form of taxes, royalties, etc. The exact nature of how the government got the money made little difference. Now with investors expecting something in return for the billions, they will be asked to invest, these details have to be spelled out in great detail before any decisions can be made. All this is saying that Aramco’s IPO will be delayed until late 2018 or more likely 2019.
Libya: According to a board member of the Libyan National Oil Corp, the country’s crude production now exceeds 700,000 b/d and is due to reach 1.2 million b/d by August and 1.7 million b/d by March. After the anti-Gadhafi coup, but before the local militia started shutting down oil, Libya was producing 1.6 million b/d so restoration of the damage that has been done in the next year does not seem like too much of a reach.
The official noted that Eni and Total have been working in the country without difficulty and Schlumberger resumed operation in Libya about three months ago. Eni is working on a new offshore production area which is due to start in about five years. Libya is thought to hold the largest oil reserves in Africa. Only about 45 percent has been explored for oil. There are still problems with the local militias near the El-Feel deposit to overcome before another 500,000 b/d comes back into production, so the production increase is not a sure thing.
Platts reported last week that China’s oil demand continues to grow, but at a slower pace than last year. Apparent oil demand which measures the amount of crude moving through domestic refineries against net imports was 2.3 percent higher in December than in December of 2015. Given that China’s economy has been growing at about 6.5 percent in recent quarters, growth in oil demand of about 3 percent sounds about right as the economy shifts from heavy industry to more services.
The smog problem still continues to plague northern China. Last week we had another official smog alert, but the pollution levels have to be very bad before an alert is declared as these alerts cause an economic slowdown. The US embassy in Beijing which monitors the city’s air quality has reported that the air there has been very unhealthy, or hazardous for much of the winter. The government is forcing steel and aluminum producers to cut more output, banning coal in a key port and shutting several fertilizer and drug plants to reduce air pollution.
Beijing is preparing to resume work on inland nuclear power stations as a means of lowering air pollution. Work on these plants was halted in 2011 after the Fukushima disaster in Japan. China’s current Five-Year Plan envisions building seven new nuclear reactors a year between 2016 and 2020. China currently has 36 nuclear reactors in operation, 21 under construction and more waiting to start.
Russia’s giant Samotlor oil field, which produced about 3 million b/d of crude in 1980 and has been in decline ever since is now producing less than 300,000. The field is said to be producing 20 times more water than oil and not earning much profit. A new plan cut the extraction tax in half for declining fields that produce more water than oil. This would enable Rosneft, the operator, to scrape the last barrels from the field at a profit.
The country’s 74-year-old President, Muhammadu Buhari, flew to London on Jan 19th and has not been heard from since. The trip was billed as a short vacation with a medical checkup but was extended the day before he was due to return home. Vice President Yemi Osinbajo has been named the acting president in an effort to maintain a sense of normalcy. The vice president is said to be meeting with delegations from the Niger Delta in an attempt to stop the attacks and revive oil production.
There were no reports of increased oil production last week. The Nigerian National Petroleum Corp says that incidents involving pipeline sabotage dropped from 43 to 18 between October and November. The petroleum minister announced last week that the country has lost $100 billion in unrealized oil revenue due to the terrorist attacks on the oil facilities. The UN said last week that Nigeria could experience a famine unlike we have ever seen anywhere.
The US government has labeled Venezuela’s vice president, Tareck el-Aissami, as an international drug trafficker and has frozen millions of dollars of his assets in the Miami area. President Maduro has denounced the accusation as untrue and has demanded an apology. The vice president has been tapped as the president’s successor and has control over many important aspects of the government. In retaliation for the US move, CNN in Spanish was removed from Venezuelan cable networks.
To add to the country’s problems Colgate and Palmolive announced last week that they were shutting down soap production in Venezuela due to the lack of foreign currency to import the necessary raw materials. One plant that was closed was producing 5 million bars of soap a month.
7. The Briefs
Discoveries of new oil and gas fields have dropped to a fresh 60-year low, as companies put a brake on exploration and large fields have become harder to find. There were only 174 oil and gas discoveries worldwide last year, compared to an average of 400-500 per year up until 2013, according to IHS Markit, the research group. The slowdown in exploration success shows that the world is likely to become increasingly reliant on “unconventional” resources such as US shale oil and gas to meet demand for energy in future decades. (2/13)
Worldwide industry layoffs: A report from Houston-based consulting firm Graves & Co. shows that the oil and gas industry has suffered 441,371 jobs lost since the beginning of the most recent downturn. (2/18)
Stranded assets? A new era of low crude prices and stricter regulations on climate change is pushing energy companies and resource-rich governments to confront the possibility that some fossil-fuel resources are likely to be left in the ground. (2/18)
The decline of Britain’s biggest gas storage site Rough, and the lack of new-build to replace it will increase dependency on imports over the next few years, boosting wholesale market volatility and consumer gas prices. Rough, the country’s only seasonal gas storage site, can usually meet around 10 percent of Britain’s peak daily gas demand but is currently capable only of handling 5 percent. (2/17)
London is choking from record levels of pollution, much of it caused by diesel cars and trucks, as well as wood-burning fires in private homes, a growing trend. It has been bad enough to evoke comparisons to the Great Smog of December 1952, when fumes from factories and house chimneys are thought to have killed as many as 12,000 Londoners. (2/18)
In Norway’s Arctic waters, explorers look set to drill a record number of wells this year, undeterred by oil prices apparently stuck below $60 a barrel. After making a discovery of as much as 100 million barrels of oil in the Barents Sea, Lundin Petroleum said that it wants to squeeze two more exploration wells into its program this year, even if it means hiring an additional rig. That could push the total number of wells in the area to 16, two more than the record in 2014. (2/15)
Norway launched the Ivar Aasen field in the country’s territorial waters in the North Sea. Ivar Aasen, operated by Norwegian group Aker BP, has a total cost framework of $3.3 billion and could be in service for the next 20 years. (2/15)
Gazprom’s bid to tap into a pipeline meant to wean Europe off Russian gas threatens to undermine a pillar of European energy policy and slow plans to develop rival deposits in the east Mediterranean. (2/15)
Saudi Arabia, the nation most identified with its massive oil reserves, is turning to wind and solar to generate power at home and help extend the life of its crucial crude franchise. Starting this year, the Kingdom plans to develop almost 10 gigawatts of renewable energy by 2023, starting with wind and solar plants in its vast northwestern desert. The effort could replace the equivalent of 80,000 barrels of oil a day now burned for power. (2/14)
Kuwait is sticking with plans to add half a million barrels a day of oil-production capacity as it prepares for the eventual expiration of the output quotas OPEC adopted to help drain a global oversupply. The head of Kuwait Oil Co. said it will continue to increase production capacity, per their five-year plan, to reach 3.65 million barrels a day by 2021. (2/16)
India’s rapidly worsening air pollution is causing about 1.1 million people to die prematurely each year and is now surpassing China’s as the deadliest in the world, a new study of global air pollution shows. The number of premature deaths in China caused by dangerous air particles, known as PM2.5, has stabilized globally in recent years but has risen sharply in India. (2/14)
Asian flows: The biggest oil producers in the Middle East are helping crude from Western Siberia boldly go where it’s rarely gone before. Top South Korean refiner SK Innovation Co. is set to receive about 1 million barrels of Urals crude in its first purchase of the Russian blend oil in a decade. The shipment was made viable because of rising costs for rival supply from the Middle East. (2/17)
South Korea, the world’s fifth-largest crude importer, doubled its imports of Iranian crude in January this year from the same time last year. This development takes market share away from Iran’s key rival, Saudi Arabia. (2/16)
Egyptian gas: Since 2011, political instability and regional insecurity have plagued Egypt’s economy, and the energy sector has not been spared. Until recently a net gas exporter, Egypt turned into a net importer in 2014 after political turmoil plunged the country into continued energy shortages. But Cairo’s fortunes may have turned in August 2015, when Italy’s oil and gas major Eni SpA discovered Zohr, the largest gas field in the Mediterranean ever to be discovered. Now Eni, as well as UK’s supermajor BP, are betting big on the Egyptian gas exploration and production, and will be making Egypt their top investment destination in the coming years, pouring billions of dollars into their projects there. (2/17)
Mexico’s PEMEX issued €4.25 billion ($4.49 billion) in bonds Tuesday, the largest euro-denominated emerging market corporate bond deal on record. (2/15)
Canada’s National Energy Board said it approved a proposed draft for the detailed route of the Trans Mountain pipeline from Alberta to the western shore. The regulator said pipeline company Kinder Morgan must now submit actual plans for each segment of the detailed route and notify any landowners whose property would be crossed. (2/14)
Pope Francis has insisted that indigenous peoples must give prior consent for any economic activity on their ancestral lands – an indirect critique as the Donald Trump administration seeks to advance construction on a $3.8 billion oil pipeline over opposition from American Indians. (2/15)
The US oil rig count increased by 6 to 597 this past week, Baker Hughes Inc. reported. With gas rigs up by 4, the total number of active oil and gas rigs in the US is now 751. (2/18)
North Dakota has released December production data for the Bakken and for all North Dakota. Statewide production was down 92,029 bpd to 942,455 bpd–the largest decline ever in North Dakota production. But the October increase in production was also the largest ever increase in North Dakota production. (2/17)
Natural gas fell to new lows after storage levels failed to shrink as quickly as analysts expected, thanks to lower-than-expected draws on storage. That’s a bearish signal that the market may be oversupplied in the months to come. (2/17)
Chesapeake Energy Corp. and the estate of its former chief executive, the late Aubrey McClendon, have agreed to settle a legal dispute involving claims that Mr. McClendon stole sensitive documents from Chesapeake to start a rival company. The Oklahoma City-based company was seeking $445 million in damages from Mr. McClendon’s estate for the alleged theft of maps and data. (2/15)
Financial rollback: President Donald Trump signed a joint resolution in the Oval Office Tuesday rolling back part of the Dodd-Frank financial regulation overhaul that would require resource extraction issuers to report payments made to governments for the commercial development of oil, natural gas or minerals. (2/16)
WY-to-CA wind: A firm controlled by Philip Anschutz, the billionaire entertainment and pro sports magnate, will soon build the largest wind farm in the United States to serve utilities in California. The $5 billion project, however, will be constructed 700 miles away in Wyoming, a state better known for coal mines and oil fields. A different Anschutz-owned firm will spend $3 billion building transmission lines to deliver the power. (2/16)
The solar industry posted its best year on record in 2016, installing 14.6 gigawatts of new solar in the U.S. That is a 95 percent increase from the 7.4 GW installed in 2015. Roughly one third of all solar capacity ever installed was installed in 2016. Of course, solar has been growing from a small base, and it still represents only around 1 percent of total electricity generation. (2/16)
RE vs. fossil fuel jobs? A new report by the United States Department of Energy concludes that American renewable energy firms are creating more jobs than their fossil fuel counterparts. The findings were part of the U.S. Energy and Employment report released last month and support claims by climate activists that supporting renewables can rejuvenate the economy while revitalizing the planet. (2/14)
Tidal power: The report of an independent review of UK tidal lagoon energy has been published by a former UK energy Minister Charles Hendry. The report praises the proposed ‘pathfinder’ tidal lagoon in Swansea Bay as a ‘no-regrets option’, and sets out a supportive case for developing the sector. (2/17)
Self-driving Bolts: General Motors Co plans to deploy thousands of self-driving electric cars in test fleets in partnership with ride-sharing affiliate Lyft, beginning in 2018. It is expected to be the largest such test of fully autonomous vehicles by any major automaker before 2020. (2/18)
Investors are buying up physical cobalt anticipating that shortages of the metal, a key component of lithium-ion batteries used in electrical cars, will spur prices to their highest levels since the 2008 financial crisis. Consultants CRU Group say electric car and plug-in hybrid vehicle sales could hit 4.4 million in 2021 and more than six million by 2025, from 1.1 million last year. (2/15)
Rare mineral issues: An overlooked report has revealed the United States is completely reliant on imports from foreign countries, most heavily China, for rare earth minerals critical to our national security. The report, released by the United States Geological Survey, stated the United States is 100% dependent on foreign imports for at least 20 elements and minerals, including 17 classified as rare earth minerals critical to the development of high-grade magnets used in aircraft and missile systems. (2/14)